<PAGE>
ISI STRATEGY FUND SHARES
(A Class of ISI Strategy Fund, Inc.)
717 Fifth Avenue
New York, New York 10022
For information call (800) 955-7175
ISI Strategy Fund, Inc. (the "Fund") is designed to maximize total return
through a combination of long-term growth of capital and current income. The
Fund's investments are actively allocated between equity securities of U.S.
issuers and U.S. Treasury securities.
The Fund offers shares of the ISI class of the Fund (the "Shares") through
securities dealers and financial institutions that act as shareholder servicing
agents. You may also buy Shares through the Fund's Transfer Agent. (See "How to
Buy Shares".)
TABLE OF CONTENTS
Page
-----
Investment Summary .......................... 2
Fees and Expenses of the Fund ............... 2
Investment Program .......................... 3
The Fund's Net Asset Value .................. 4
How to Buy Shares ........................... 4
How to Redeem Shares ........................ 4
Telephone Transactions ...................... 5
Sales Charges ............................... 5
Dividends and Taxes ......................... 7
Investment Advisor and Sub-Advisor .......... 7
Administrator ............................... 8
Financial Highlights ........................ 8
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
The date of this Prospectus is October 1, 1998.
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INVESTMENT SUMMARY
Objectives and Strategies
The Fund seeks to maximize total return through a combination of long-term
growth of capital and current income. The Fund's investments are actively
allocated between equity securities of U.S. issuers and U.S. Treasury
securities. International Strategy & Investment Inc. ("ISI" or the "Advisor"),
the Fund's investment advisor determines the relative weightings of equity and
Treasury securities in the Fund's portfolio and manages the Treasury portion of
the portfolio. Edward S. Hyman and R. Alan Medaugh, Chairman and President,
respectively, of ISI will guide the allocation of the Fund's assets between
equity securities and Treasury securities based on ISI's analysis of the pace
of the economy and its forecasts for the direction of interest rates and
corporate earnings. Wilshire Associates Incorporated, the Fund's sub-advisor
("Wilshire" or the "Sub-Advisor") selects the Fund's equity investments with a
mathematical model that seeks to capture the return of the broad U.S. equity
market as represented by the Wilshire 5000 Index ("Wilshire 5000"). Using this
model, Wilshire selects a sampling of the stocks contained in the Wilshire 5000
in an attempt to match the return and volatility of the index.
Risk Profile
The Fund may be most appropriate for investors seeking long-term total return
through an approach that seeks to moderate risk by balancing equity and fixed
income investments. The value of an investment in the Fund will vary from
day-to-day based on changes in the prices of the equity and Treasury securities
in the Fund's portfolio. The Fund's equity investments can be expected to be
more volatile than the Fund's Treasury investments.
The value of the Fund's equity investments will change in relation to changes
in the Wilshire 5000. The value of the Fund's Treasury investments will change
in response to economic and market factors, especially interest rate changes.
In general, a change in interest rates will cause an inverse change in the
value of the Treasury investments.
Whether or not the Fund benefits from its active allocation strategy will
depend on the Advisor's success in assessing economic trends and their impact
on financial assets. An investment in the Fund is not a bank deposit and is not
guaranteed by the FDIC or any government agency.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<S> <C>
Shareholder Fees (fees paid directly from your investment):
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.45%
Maximum Sales Charge Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge ................................................ None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees .............................................................. 0.40%
Distribution and/or Service (12b-1) Fees ..................................... 0.25%
Other Expenses ............................................................... 1.60%
--------
Total Annual Fund Operating Expenses ......................................... 2.25%
========
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Note Regarding Total Annual Fund Operating Expenses:
The Advisor is currently waiving its fees and/or reimbursing expenses so that
the Fund's Total Operating Expenses do not exceed 1.00%. These fee waivers and
expense reimbursements are voluntary and may be discontinued at any time. For
the period from September 16, 1997 (commencement of operations) through May 31,
1998, the Advisor and the Fund's administrator waived their respective fees and
the Advisor reimbursed certain Fund expenses. Due to these waivers and expense
reimbursements, the Fund's Total Operating Expenses were reduced from 2.25% to
1.00%.
2
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Example:
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions, your costs would be:
1 year 3 years 5 years 10 years
- -------- --------- --------- ---------
$ 663 $1,117 $1,596 $2,915
The rules of the SEC require that the maximum sales charge be reflected in the
above table. However, you may qualify for reduced sales charges or no sales
charge at all. (Refer to the section on sales charges.) If you hold Shares for
a long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
Investment Objective, Policies and Risk
Considerations
The Fund's investment objective is to maximize total return through a
combination of long-term growth of capital and current income. The Fund seeks
to achieve this objective through an active asset allocation strategy that
involves apportioning the Fund's assets between diversified investments in
equity and Treasury securities.
The Fund will invest its assets in a ratio of (1) approximately 80% equity
securities to 20% Treasury securities when an aggressive strategy is deemed
warranted, (2) approximately 60% equity securities to 40% Treasury securities
when a neutral strategy is deemed warranted, and (3) approximately 40% equity
securities to 60% Treasury securities when a conservative strategy is deemed
warranted. The allocation of the Fund's assets will be reviewed periodically in
light of ISI's forecasts and may be reallocated when ISI determines it
appropriate.
In managing the equity securities in the Fund's portfolio, Wilshire will
attempt to capture the return of the broad U.S. equity market as represented by
the Wilshire 5000. To accomplish this, Wilshire uses a mathematical model to
select a sampling of the stocks contained in the Wilshire 5000. With this
model, Wilshire constructs the Fund's equity portfolio so that its market
capitalization and industry sector weightings closely resemble those of the
Wilshire 5000. Therefore, Wilshire expects that the performance and volatility
of the Fund's equity portfolio will approximately resemble that of the Wilshire
5000. The Wilshire 5000 consists of all U.S. common stocks that trade on a
regular basis on the New York and American Stock Exchanges and in the NASDAQ
over-the-counter market.
ISI will manage the Treasury securities in the Fund's portfolio with a view
toward, first, a high level of total return with relative stability of
principal and, second, high current income. Therefore, in addition to yield,
the potential for capital gains and appreciation resulting from possible
changes in interest rates will be a consideration in selecting investments. At
certain times the average maturity of the Treasury securities held by the Fund
may be relatively short (from under one year to five years, for example) and at
other times may be relatively long (over 10 years, for example).
An investment in the Fund entails risk. Equity securities are subject to market
risks that may cause their prices to fluctuate over time and these price
fluctuations may differ from changes in the value of the Wilshire 5000. The
prices of equity securities are sensitive to developments affecting particular
companies and to general economic conditions that affect particular industry
sectors or the securities markets as a whole. Because the equity investments of
the Fund are not actively managed, the value of the Fund's equity investments
will change in relation to changes in the Wilshire 5000. Treasury securities
are subject to interest rate risk. This is especially true for securities with
longer maturities and for STRIPS (securities that do not pay interest currently
but which are purchased at a discount and are payable in full at maturity).
Thus, a decrease in interest rates will generally result in an increase in the
value of the Shares. Conversely, during periods of rising interest rates, the
value of the Shares will generally decline.
To protect the Fund under adverse market conditions, the Advisors may make
temporary, defensive investments in money market instruments and U.S.
Government obligations, investments that would not ordinarily be consistent
with the Fund's objectives. The Advisors would do so only if they believed the
risk of loss outweighed the opportunity for gain.
3
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THE FUND'S NET ASSET VALUE
The following sections describe how to buy and redeem shares of the Fund.
The price you pay or receive is based on the Fund's net asset value per share.
When you buy Shares, the price you pay may be increased by a sales charge. Read
the sections on sales charges for details on how and when this charge may or
may not be imposed.
The Fund determines its net asset value per share on each business day as of
the close of trading on the New York Stock Exchange (ordinarily 4:00 p.m.
Eastern Time). It is calculated by subtracting the liabilities attributable to
a class from its proportionate share of the Fund's assets and dividing the
result by the outstanding shares of the class.
In valuing its assets, the Fund prices investments at their market value.
You may buy or redeem shares on any day on which the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.
HOW TO BUY SHARES
You may buy Shares through your securities dealer or through any financial
institution that is authorized to act as a shareholder servicing agent. You may
also buy shares by sending your check (along with a completed Application Form)
directly to the Fund. The Application Form, which includes instructions, is
attached to this Prospectus.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $5,000. Subsequent investments must be
at least $250. The following are exceptions to these minimums:
o If you are investing in an IRA account or a qualified retirement plan, your
initial investment may be as low as $1,000.
o If you are a participant in the Fund's Automatic Investing Plan, your initial
investment may be as low as $250. If you participate in the monthly plan,
your subsequent investments may be as low as $100. If you participate in the
quarterly plan, your subsequent investments may be as low as $250. Refer to
the section on the Fund's Automatic Investing Plan for details.
Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the attached
Application Form or contact your securities dealer, your servicing agent, or
the Transfer Agent.
Automatic Investing Plan. You may elect to make a regular monthly or quarterly
investment in Shares. The amount you decide upon will be withdrawn from your
checking account using a pre-authorized check. When the money is received by
the Transfer Agent, it will be invested in Shares at that day's offering price.
Either you or the Fund may discontinue your participation upon 30 days' notice.
Dividend Reinvestment Plan. Unless you elect otherwise, all income and capital
gains distributions will be reinvested in additional Shares at net asset value.
You may elect to receive your distributions in cash or to have your
distributions invested in shares of other funds in the ISI family of funds. To
make either of these elections or to terminate automatic reinvestment, complete
the appropriate section of the attached Application Form or notify the Transfer
Agent, your securities dealer or your servicing agent at least five days before
the date on which the next dividend or distribution will be paid.
HOW TO REDEEM SHARES
You may redeem all or part of your investment through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If you have an account with the Fund
that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer
4
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Agent will mail your redemption check within seven days after it receives your
order in proper form. Refer to the section on telephone transactions for more
information on this method of redemption.
Your securities dealer, your servicing agent or the Transfer Agent may require
the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number of
shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the shares exactly as their names appear on the account.
2) If you are redeeming more than $50,000, a guarantee of your signature by a
member of the Federal Deposit Insurance Corporation, a trust company, broker,
dealer, securities exchange or association, clearing agency, savings
association or (if authorized by state law) credit union.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
4) Any additional documents that may be required if your account is in the name
of a corporation, partnership, trust or fiduciary.
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next dividend
payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you by check, whether or not that is the payment
option you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less, the
Fund has the power to redeem the remaining shares after giving you 60 days'
notice. The Fund reserves the right to redeem shares in kind under certain
circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange to
have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the
tax and sales charge implications normally associated with Fund redemptions.
Contact your securities dealer, your servicing agent or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
If your shares are in an account with the Transfer Agent, you may redeem them
in any amount up to $50,000 or exchange them for shares in another ISI fund by
calling the Transfer Agent on any Business Day between the hours of 8:30 a.m.
and 5:30 p.m. (Eastern Time). You are automatically entitled to telephone
transaction privileges unless you specifically request that no telephone
redemptions or exchanges be accepted for your account. You may make this
election when you complete the Application Form or at any time thereafter by
completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that telephoned instructions are genuine. These procedures include requiring
you to provide certain personal identification information when you open your
account and before you effect each telephone transaction. You may be required
to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that they reasonably believe to be genuine.
Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
SALES CHARGES
Purchase Price
The price you pay to buy shares will be the Fund's offering price which is
calculated by adding any applicable sales charges to the net asset value per
share. The amount of any sales charge included in your purchase price will be
according to the following schedule:
Sales Charge as % of
------------------------
Offering Net Amount
Amount of Purchase Price Invested
- -------------------------------- ---------- -----------
Less than $50,000............ 4.45% 4.66%
$50,000 - $99,999............ 3.50% 3.63%
$100,000 - $249,999........... 2.50% 2.56%
$250,000 - $499,999........... 2.00% 2.04%
$500,000 - $999,999........... 1.50% 1.52%
$1,000,000 - $1,999,999......... 0.75% 0.76%
$2,000,000 - $2,999,999......... 0.50% 0.50%
$3,000,000 - and over........... None None
5
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The sales charge you pay on your current purchase of Shares may be reduced
under the circumstances listed below. Certain restrictions may apply for Shares
purchased through a special offer.
Rights of Accumulation. If you are purchasing additional Shares of this Fund or
shares of any other mutual fund in the ISI family of funds, you may combine the
value of your purchases with the value of your existing investments to
determine whether you qualify for a reduced sales charge. (For this purpose
your existing investments will be valued at the higher of cost or current
value.) You may also combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose. You must be able
to provide sufficient information to verify that you qualify for this right of
accumulation.
Letter of Intent. If you anticipate making additional purchases of Shares over
the next 13 months, you may combine the value of your current purchase with the
value of your anticipated purchases to determine whether you qualify for a
reduced sales charge. You will be required to sign a letter of intent
specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If,
at the end of the 13-month period, the total value of your purchases is less
than the amount you indicated, you will be required to pay the difference
between the sales charges you paid and the sales charges applicable to the
amount you actually did purchase. Some of the shares you own will be redeemed
to pay this difference.
Purchases at Net Asset Value. You may buy Shares without paying a sales charge
under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of Shares
made within the last six months, provided that the amount you are reinvesting
is at least $5,000.
2) If you are exchanging an investment in another ISI fund for an investment in
this Fund (see "Purchases by Exchange" for a description of the conditions).
3) If you are a current or retired Director of the Fund, a director, employee or
a member of the immediate family of an employee of any of the following or
their respective affiliates: the Fund's administrator, the Advisors and any
broker-dealer authorized to sell shares of the Fund.
4) If you purchase Shares in a fiduciary or advisory account with a bank, bank
trust department, registered investment advisory company, financial planner
or securities dealer purchasing shares on your behalf. To qualify for this
provision you must be paying an account management fee for the fiduciary or
advisory services. You may be charged an additional fee by your securities
dealer or servicing agent if you buy shares in this manner;
5) If you pay for your purchase with the proceeds from a redemption of shares of
any other mutual fund on which you have paid a sales charge, or from a sale
of shares of any closed-end fund. In order to qualify for this provision, you
must purchase your shares by February 28, 1999 and provide documentation of
your redemption or sale.
Purchases by Exchange
You may exchange shares of any other fund in the ISI family of funds with the
same sales charge structure for an equal dollar amount of Shares without
payment of the sales charges described above or any other charge. In addition,
you may exchange shares of any fund in the ISI family of funds with a lower
sales charge structure or that were purchased through a special offer, for an
equal dollar amount of Shares if you have owned the shares you are redeeming
for at least 24 months. If you have owned them for less than 24 months, you
will be charged the difference in sales charges. You may enter both your
redemption and purchase orders on the same Business Day or, if you have already
redeemed the shares of the other fund, you may enter your purchase order within
90 days of the redemption. The Fund may modify or terminate these offers of
exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing agent.
Contact them for details on how to enter your order. If your shares are in an
account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
Redemption Price
The price you receive when you redeem shares will be the net asset value per
share.
6
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Distribution Plan
The Fund pays your securities dealer or shareholder servicing agent
distribution and other fees for the sale of its shares and for shareholder
service. Shares pay an annual distribution fee equal to 0.25% of average daily
net assets. Because these fees are paid out of net assets on an on-going basis,
they will, over time, increase the cost of your investment and may cost you
more than paying other types of sales charges.
DIVIDENDS AND TAXES
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income in the form of quarterly dividends and to
distribute taxable net capital gains on an annual basis.
Tax Treatment of Dividends and Distributions
The dividends and distributions you receive from the Fund may be subject to
federal, state and local taxation, depending on your tax situation. The tax
treatment of dividends and distributions is the same whether or not you
reinvest them. Dividends are ordinary income and capital gains distributions
are taxed based on how long the Fund held the assets. The Fund will tell you
annually how to treat dividends and distributions.
If you redeem shares of the Fund you will be subject to tax on any gains you
earn based on your holding period for the shares. An exchange of shares of the
Fund for shares of another fund is a sale of Fund shares for tax purposes.
INVESTMENT ADVISOR AND SUB-ADVISOR
International Strategy & Investment Inc. is the Fund's investment advisor and
Wilshire Associates Incorporated is the Fund's sub-advisor. As of July 31,
1998, the Advisor had approximately $500 million under management. The Advisor
also acts as investment advisor to Total Return U.S. Treasury Fund, Inc.,
Managed Municipal Fund, Inc. and North American Government Bond Fund, Inc.,
open-end investment companies with approximately $460 million in net assets as
of July 31, 1998. Wilshire is a registered investment advisor with
approximately $8.7 billion of net assets under management as of July 31, 1998.
As compensation for its services for the period from September 16, 1997
(commencement of operations) through the fiscal year ended May 31, 1998, ISI
waived its fees and reimbursed expenses of $60,048. For the same period,
Wilshire waived its fees.
Portfolio Managers
The Fund's portfolio managers are Edward S. Hyman and R. Alan Medaugh of ISI,
and Thomas D. Stevens, David R. Borger and Michael J. Napoli, Jr. of Wilshire.
Mr. Hyman, Chairman of the Fund since its inception and Chairman of ISI since
1991, is responsible for developing the forecasts and economic analysis on
which the allocation strategy and the selection of investments in the Fund's
portfolio of U.S. Treasury securities are based (see "Investment Program").
Before joining ISI, Mr. Hyman was a vice chairman and member of the Board of
C.J. Lawrence Inc. and prior thereto, an economic consultant at Data Resources.
He writes a variety of international and domestic economic research reports
that follow trends that may determine the direction of interest rates. These
international and domestic reports are sent to ISI's private institutional
clients in the United States and overseas. The periodical Institutional
Investor, which rates analysts and economists on an annual basis, has rated Mr.
Hyman as its "first team" economist, which is its highest rating, in each of
the last 18 years.
Mr. Medaugh, President and Director of the Fund since its inception and
President of ISI since 1991, is responsible for executing the allocation
strategy as well as the day-to-day management of the Fund's portfolio of U.S.
Treasury securities. Prior to joining ISI, Mr. Medaugh was Managing Director of
C.J. Lawrence Fixed Income Management and prior thereto, Senior Vice President
and bond portfolio manager at Fiduciary Trust International. While at Fiduciary
Trust International, Mr. Medaugh led their Fixed-Income Department, which
managed $5 billion of international fixed-income portfolios for institutional
clients. Mr. Medaugh also had prior experience as a bond portfolio manager at
both Putnam Management Company and Fidelity Management and Research.
Mr. Stevens, Mr. Borger and Mr. Napoli have shared responsibility for managing
the Fund's portfolio of equity securities of U.S issuers since the Fund's
inception. Mr. Stevens, a Vice President of the Fund, has served as a
7
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Senior Vice President and Principal of Wilshire and Chief Investment Officer of
Wilshire Asset Management ("WAM"), a division of Wilshire for each of the last
five years. He has been employed with Wilshire since 1980. Prior to joining
Wilshire, Mr. Stevens was a portfolio manager and analyst at the National Bank
of Detroit. Mr. Borger, a Vice President of the Fund, has served as a Vice
President and Principal of Wilshire and Director of Research at WAM for each of
the last five years. Mr. Borger has been employed with Wilshire since 1986.
Before joining Wilshire, he was a Vice President and Chief of Quantitative
Investment Methods at the National Bank of Detroit, where he managed an equity
index fund. Mr. Napoli, a Director of the Fund, has served as a Vice President
of Wilshire and Director of Marketing for WAM for each of the last five years
and as a Principal of Wilshire since 1993. Mr. Napoli has been employed with
Wilshire from 1991 to the present. Prior to joining Wilshire, he was employed
with Drexel Burnham Lambert, Bankers Trust Company and Ameritrust Company.
ADMINISTRATOR
Investment Company Capital Corp. ("ICC") provides administration services to
the Fund. ICC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which the
Shares are distributed and oversight of the relationship between the Fund and
its other service providers. ICC is also the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance since it began operations. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned on an investment in the
Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Deloitte & Touche LLP, whose report, along with
the Fund's financial statements, are included in the Statement of Additional
Information, which is available upon request.
Financial Highlights Table (for a share outstanding throughout the period):
For the Period
September 16, 1997(1)
through May 31,
1998
--------------------
Per Share Operating Performance:
Net asset value at beginning of period $ 10.00
-------
Income from Investment Operations:
Net investment income ..................... 0.13
Net realized and unrealized gain on
investments ............................ 0.96
-------
Total from Investment Operations .......... 1.09
Less Distributions:
Distributions from net investment
income ................................. (0.09)
Total distributions ....................... (0.09)
--------
Net asset value at end of period .......... $ 11.00
========
Total Return ................................. 10.94%
Ratios to Average Daily Net Assets:
Expenses .................................. 1.00%(2,3)
Net investment income ..................... 2.03%(2,4)
Supplemental Data:
Net assets at end of period (000) ......... $18,220
Portfolio turnover rate ................... 20.08%
- ------------------------
1 Commencement of operations.
2 Annualized.
3 Ratio of expenses to average net assets prior to expense waiver was 2.25%.
4 Ratio of net investment income to average net assets prior to expense waiver
was .775%.
8
<PAGE>
ISI STRATEGY FUND SHARES
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "ISI Strategy Fund Shares" and mail with this Application
to:
ISI Mutual Funds
P.O. Box 419426
Kansas City, MO 64141-6426
For assistance in completing this form, please call the Transfer Agent at (800)
882-8585.
To open an IRA account, call ISI at (800) 955-7175 to request an application.
Your Account Registration (Please Print)
-------------------------------------
Existing Account No., if any
Individual or Joint Tenant
- --------------------------------------
First Name Initial Last Name
- --------------------------------------
Social Security Number
- --------------------------------------
Joint Tenant Initial Last Name
- --------------------------------------
Social Security Number
Corporations, Trusts, Partnerships, etc.
- --------------------------------------
Name of Corporation, Trust or Partnership
- --------------------------------------
Tax ID Number
- --------------------------------------
Name of Trustees (If to be included in the Registration)
Gifts to Minors
- --------------------------------------
Custodian's Name (only one allowed by law)
- --------------------------------------
Minor's Name (only one)
- ----------------- ----------------------------------
Social Security Number of Minor Minor's Date of Birth (Mo./Day/Yr.)
under the _____________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
- --------------------------------------
Street
- -------------------------------------------------------------------------
City State Zip
( )
- --------------------------------------
Daytime Phone
Statement of Intention (Optional)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. I intend to invest over a 13-month period in ISI
Strategy Fund Shares in an aggregate amount at least equal to:
___ $50,000 ___ $100,000 ___ $250,000 ___ $500,000 ___ $1,000,000
___ $2,000,000 ___ $3,000,000
Right of Accumulation (Optional)
List the Account numbers of other ISI Funds that you or your immediate family
already own that qualify for this purchase.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Distribution Options
Please check appropriate boxes. There is no sales charge for reinvested
dividends. If none of the options are selected, all distributions will be
reinvested.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in
additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 882-8585 for information about reinvesting your dividends in other
funds in the ISI Family of Funds.
<PAGE>
Automatic Investing Plan (Optional)
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically
invest $___________ for me, on a monthly or quarterly basis, on or about the
20th of each month or if quarterly, the 20th of January, April, July and
October, and to draw a bank draft in payment of the investment against my
checking account. (Bank drafts may be drawn on commercial banks only.)
Minimum Initial Investment: $250
Subsequent Investments (check one): [ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
Please attach a voided check.
- ------------------------------------- -------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------- -------------------------------------
Existing ISI Strategy Fund Account Depositor's Signature Date
No., if any (if joint acct., both must sign)
Systematic Withdrawal Plan (Optional)
[ ] Beginning the month of ______________, 19__, please send me checks
on a monthly or quarterly basis, as indicated below, in the amount of
$_____________________, from shares that I own, payable to the account
registration address as shown above. (Participation requires minimum account
value of $10,000.)
Frequency (check one): [ ] Monthly
[ ] Quarterly (January, April, July and October)
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect to
other ISI Funds) unless I mark one or both of the boxes below.
No, I/We do not want: [ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:___________________________ Bank Account No.:________________________
Address: _______________________ Bank Account Name:_______________________
_______________________
Signature and Taxpayer Certification
The Fund may be required to withhold and remit to the U.S. Treasury 31% of any
taxable dividends, capital gains distributions and redemption proceeds paid to
any individual or certain other non-corporate shareholders who fail to provide
the information and/or certifications required below. This backup withholding is
not an additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
By signing this Application, I hereby certify under penalties of perjury that
the information on this Application is complete and correct and that as required
by federal law: (Please check applicable boxes)
[ ] U.S. Citizen/Taxpayer:
[ ] I certify that (1) the number shown above on this form is the correct
Social Security Number or Tax ID Number and (2) I am not subject to any
backup withholding either because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding.
[ ] If no Tax ID Number or Social Security Number has been provided above,
I have applied, or intend to apply, to the IRS or the Social Security
Administration for a Tax ID Number or a Social Security Number, and I
understand that if I do not provide either number to the Transfer Agent
within 60 days of the date of this Application or if I fail to furnish
my correct Social Security Number or Tax ID Number, I may be subject to
a penalty and a 31% backup withholding on distributions and redemption
proceeds. (Please provide either number on IRS Form W-9. You may
request such form by calling the Transfer Agent at 800-882-8585.)
[ ] Non-U.S. Citizen/Taxpayer: Indicated country of residence for tax
purposes: __________________
Under penalties of perjury, I certify that I am not a U.S. citizen or
resident and I am an exempt foreign person as defined by the Internal
Revenue Service.
<PAGE>
I acknowledge that I am of legal age in the state of my residence. I have
received a copy of the Fund's prospectus.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- ------------------------------------- -------------------------------------
Signature Date Signature Date
(if a joint account, both must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name:_________________________ Dealer Code:______________________
Dealer's Address:______________________ Branch Code:______________________
________________________
Representative:________________________ Rep. No.:_________________________
<PAGE>
ISI STRATEGY FUND SHARES
(A Class of ISI Strategy Fund, Inc.)
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
Sub-Advisor Distributor
WILSHIRE ASSOCIATES INCORPORATED INTERNATIONAL STRATEGY &
1299 Ocean Avenue, Suite 700 INVESTMENT GROUP INC.
Santa Monica, California 90401 717 Fifth Avenue
New York, New York 10022
1-800-955-7175
Administrator Independent Auditors
INVESTMENT COMPANY CAPITAL CORP. DELOITTE & TOUCHE LLP
One South Street 117 Campus Drive
Baltimore, Maryland 21202 Princeton, New Jersey 08540
Custodian Fund Counsel
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-882-8585
<PAGE>
ISI
STRATEGY FUND
SHARES
(A Class of ISI Strategy Fund, Inc.)
You may obtain the following additional information about the Fund, free
of charge, from your securities dealer or servicing agent or by calling (800)
955-7175:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
o The Fund's most recent annual report contains detailed financial information
and a discussion of market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal
year.
In addition you may review information about the Fund (including the
SAI) at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. (Call 1-800-SEC-0330 to find out about the operation of the
Public Reference Room.) The Commission's Internet site at http://www.sec.gov
has reports and other information about the Fund and you may get copies of this
information by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-5009. You will be charged for duplicating fees.
For other shareholder inquiries, contact the Fund at (800) 955-7175, the
Transfer Agent at (800) 882-8585 or your securities dealer or servicing agent.
Investment Company Act. File No. 811-8291
[GRAPHIC OMITTED]
ISI
STRATEGY FUND
SHARES
(A Class of ISI Strategy Fund, Inc.)
An open-end mutual fund seeking to maximize total return through a
combination of long-term growth of capital and current income by actively
allocating investments between equity securities of U.S. issuers and U.S.
Treasury Securities.
October 1, 1998
PROSPECTUS
- ----------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------
ISI STRATEGY FUND, INC.
717 Fifth Avenue
New York, New York 10022
----------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH
A PROSPECTUS FOR THE APPLICABLE CLASS, WHICH MAY BE
OBTAINED FROM YOUR SECURITIES DEALER OR BY WRITING
OR CALLING INTERNATIONAL STRATEGY & INVESTMENT GROUP INC.,
717 FIFTH AVENUE, NEW YORK, NEW YORK 10022, (800) 955-7175
Statement of Additional Information Dated: October 1, 1998
Relating to the Prospectus dated October 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. GENERAL INFORMATION AND HISTORY..........................................1
2. YEAR 2000 ...............................................................1
3. INVESTMENT OBJECTIVES AND POLICIES.......................................1
4. VALUATION OF SHARES AND REDEMPTION.......................................7
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.....................8
6. MANAGEMENT OF THE FUND..................................................11
7. INVESTMENT ADVISORY AND OTHER SERVICES..................................17
8. ADMINISTRATION..........................................................18
9. DISTRIBUTION OF FUND SHARES.............................................18
10. BROKERAGE ..............................................................21
11. CAPITAL SHARES..........................................................22
12. SEMI-ANNUAL REPORTS.....................................................23
13. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.......................23
14. INDEPENDENT AUDITORS....................................................24
15. LEGAL MATTERS...........................................................24
16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.....................24
17. PERFORMANCE COMPUTATIONS................................................24
18. FINANCIAL STATEMENTS....................................................26
<PAGE>
1. GENERAL INFORMATION AND HISTORY
ISI Strategy Fund, Inc. (the "Fund") is an open-end management
investment company. Under the rules and regulations of the Securities and
Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with information concerning the activities of the company
being considered for investment. The Fund has one class of shares: ISI Strategy
Fund Shares (the "ISI Shares"). The ISI Shares Prospectus contains important
information concerning ISI Shares offered by the Fund, and may be obtained
without charge from the Fund's distributor (the "Distributor") or from
Participating Dealers that offer shares of the Fund (the "Shares") to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. As used herein, the "Fund" refers to ISI Strategy Fund, Inc.
and specific references to any class of the Fund's Shares will be made using the
name of such class. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectus. To
avoid unnecessary repetition, references are made to related sections of the
Prospectus. In addition, the Prospectus and this Statement of Additional
Information omit certain information for the Fund and its business that is
contained in the Registration Statement about the Fund and its Shares filed with
the SEC. Copies of the Registration Statement as filed, including such omitted
items, may be obtained from the SEC by paying the charges prescribed under its
rules and regulations.
The Fund was incorporated under the laws of the State of Maryland
on June 12, 1997. The Fund filed a registration statement with the SEC
registering itself as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act") and its Shares under the Securities Act of 1933, as amended (the
"Securities Act"), and commenced operations on September 16, 1997.
Under a license agreement dated September 15, 1997 between the
Fund and International Strategy & Investment Inc., International Strategy &
Investment Inc. licenses to the Fund the "ISI" name and logo, but retains rights
to that name and logo, including the right to permit other investment companies
to use them. In addition, Wilshire Associates Incorporated licenses to the Fund
the "Wilshire" name and logo, but retains rights to that name and logo,
including the right to permit other investment companies to use them.
2. YEAR 2000
The Fund depends on the smooth functioning of computer systems in
almost every aspect of its business. The Fund could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000 and distinguish between the year 2000 and the year
1900. The Fund has asked its service providers whether they expect to have their
computer systems adjusted for the year 2000 transition, and received assurances
from each that its system is expected to accommodate the year 2000 without
material adverse consequences to the Fund. The Fund and its shareholders may
experience losses if these assurances prove to be incorrect or if issuers of
portfolio securities or third parties, such as custodians, banks, broker-dealers
or others, with which the Fund does business experience difficulties as a result
of year 2000 issues.
3. INVESTMENT OBJECTIVES AND POLICIES
Investment Objective and Policies of the Fund
The Fund's investment objective is to maximize total return
through a combination of long-term growth of capital and current income. The
Fund seeks to achieve this objective through
-1-
<PAGE>
an active asset allocation strategy that involves apportioning the Fund's assets
between diversified investments in equity securities of U.S. issuers and U.S.
Treasury Securities. The Fund may make other investments including securities
index futures contracts and Standard & Poor's Depositary Receipts ("SPDRs")
As discussed below, the Fund may, especially during its early
stages, use securities index futures contracts as a means of obtaining exposure
to the U.S. equity markets. The allocation of the Fund's assets will be reviewed
periodically in light of ISI's forecasts and may be reallocated when ISI
determines it appropriate. The Fund's assets will be rebalanced on a quarterly
basis if at that time the market value of the equity portion of the portfolio is
below 40% or above 80% of the Fund's total assets.
Wilshire Associates Incorporated ("Wilshire") will mange the
equity portion of the Fund's Portfolio. Wilshire and its affiliates have, since
1983, focused on building and maintaining portfolios based on the Wilshire 5000
Index ("Wilshire 5000" or "Index") and other custom-structured U.S. equity
applications, and currently have $8 billion under management in these
portfolios. In managing the equity securities of U.S. issuers in the Fund's
portfolio, Wilshire will attempt to capture the return of the broad U.S. equity
market. Ultimately, Wilshire expects that the performance and volatility of the
Fund's equity portfolio will approximately resemble that of the Wilshire 5000.
The Wilshire 5000 consists of all U.S. common stocks that trade on a regular
basis on the New York and American Stock Exchanges and in the NASDAQ
over-the-counter market. Approximately 7,300 stocks, including large-, medium-
and small-capitalization stocks are included in the Index. In constructing the
Fund's portfolio, Wilshire will, as the Fund grows, conduct a stratified
sampling of the Wilshire 5000, resulting optimally in the purchase of 1,500 to
2,000 common stocks of issuers included in the Index based on sector allocation
and other investment techniques, in an attempt to achieve performance and
volatility comparable to the Index. Wilshire may use securities index futures
contracts and SPDRs to gain market exposure without purchasing individual
stocks. For example, the Fund may invest in security index futures contracts on
the Standard & Poor's 500 Index ("S&P 500") and the Russell 2000 Index as well
as S&P 500 SPDRs and S&P MidCap 400 Index SPDRs for market exposure.
ISI will manage the U.S. Treasury Securities in the Fund's
portfolio with a view toward, first, a high level of total return with relative
stability of principal and, second, high current income. Therefore, in addition
to yield, the potential for capital gains and appreciation resulting from
possible changes in interest rates will be a consideration in selecting
investments. ISI will be free to take advantage of the entire range of
maturities offered by U.S. Treasury Securities and may adjust the average
maturity of such securities held in the Fund's portfolio from time to time,
depending on its assessment of the relative yields available on securities of
different maturities and its expectations of future changes in interest rates.
Thus, at certain times the average maturity of the U.S. Treasury Securities held
by the Fund may be relatively short (from under one year to five years, for
example) and at other times may be relatively long (over 10 years, for example).
In determining which direction interest rates are likely to move, the Advisor
relies on the economic analysis made by Mr. Hyman. There can be no assurance
that such economic analysis will accurately predict interest rate trends or that
portfolio strategies based on Mr. Hyman's economic analysis will be effective.
The Fund's investment objective and its general investment
policies are described in the Prospectus. Additional investment restrictions are
set forth below. This Statement of Additional Information also describes other
investment practices in which the Fund may engage.
Except as specifically identified under "Investment Restrictions"
in the Prospectus and in this Statement of Additional Information, the
investment policies described in these documents are not fundamental, and the
Directors may change such policies without an affirmative vote of a
-2-
<PAGE>
majority of the Fund's outstanding Shares (as defined under "Capital Shares"
below). The Fund's investment objective is fundamental, however, and may not be
changed without such a vote.
Equity Securities
The Fund will invest in equity securities of U.S. issuers, which
are subject to market risks that may cause their prices to fluctuate over time
and the price fluctuations may differ from changes in the value of the Wilshire
5000. Fluctuations in the value of the equity securities held by the Fund will
cause the value of the Shares to fluctuate.
U.S. Treasury Securities
The Fund will invest in U.S. Treasury Securities which are
considered among the safest of fixed-income investments. Because of this added
safety, the yields available from U.S. Treasury Securities are generally lower
than the yields available from corporate debt securities. As with other debt
securities, the value of U.S. Treasury Securities changes as interest rates
fluctuate. This is especially true for securities with longer maturities and for
STRIPS (securities that do not pay interest currently but which are purchased at
a discount and are payable in full at maturity). Changes in the value of
portfolio securities will not affect interest income from those securities but
will be reflected in the Fund's net asset value. Thus, a decrease in interest
rates will generally result in an increase in the value of the Shares.
Conversely, during periods of rising interest rates, the value of the Shares
will generally decline. The magnitude of these fluctuations will generally be
greater at times when the average maturity of the U.S. Treasury Securities held
by the Fund is longer.
Standard & Poor's Depositary Receipts
The Fund may invest in SPDRs which are shares of common stock in
a unit investment trust ("UIT") traded on the American Stock Exchange. SPDRs
represent a proportionate undivided interest in a basket of securities owned by
the UIT, which consists of substantially all of the common stocks, in
substantially the same weighting, as the component stocks of a specified S&P
index. The performance of a SPDR is intended to track the performance of the
component stocks of the relevant S&P index. The composition and weighting of the
securities owned by the UIT will be adjusted from time to time to conform to
periodic changes in the volatility and relative weightings of such S&P index.
The Fund's investment in SPDRs will be subject to limitations on investment in
other investment companies (see "Investment Restrictions"). An investment in
SPDRs is subject to the same risk of fluctuation in value as the basket of
common stocks underlying the SPDR. In particular, the price at which the
underlying SPDR securities may be sold and the value of the SPDR may be
adversely affected if the secondary trading markets for the SPDRs are limited or
absent. Additionally, the basket of common stocks underlying the SPDR may not
exactly replicate the performance of the specified index because of transaction
costs and other expenses. The basket of common stocks underlying the SPDR may
also be unable to fully replicate the performance of the specified S&P index due
to the temporary unavailability of certain underlying securities or due to other
extraordinary circumstances.
Repurchase Agreements
The Fund may agree to purchase securities issued by the United
States Treasury ("U.S. Treasury Securities") from creditworthy financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. Such
repurchase agreements will be fully collateralized. The Fund's procedures
regarding
-3-
<PAGE>
repurchase agreements are discussed in greater detail in the Fund's Prospectus.
The collateral for these repurchase agreements will be held by the Fund's
custodian or by a duly appointed sub-custodian. The Fund will enter into
repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Fund's investment advisor. The list of
approved banks and broker-dealers will be monitored regularly by the Fund's
investment advisor (the "Advisor") and the Fund's sub-advisor (the
"Sub-Advisor") (collectively, the "Advisors") and reviewed at least quarterly by
the Fund's Board of Directors. The seller under a repurchase agreement may be
required to maintain the value of the securities subject to the repurchase
agreement at not less than the repurchase price. Default by the seller would,
however, expose the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying obligations. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the security, the Fund may be delayed or limited in its ability to sell the
collateral.
When-Issued Securities
The Fund may make purchases of U.S. Treasury Securities, at the
current market value of the securities, on a when-issued basis. When such
transactions are negotiated, the yield to maturity is fixed. The coupon interest
rate on such U.S. Treasury Securities is fixed at the time of the U.S. Treasury
auction date therefore determining the price to be paid by the Fund, but
delivery and payment will take place after the date of the commitment. A
segregated account of the Fund, consisting of cash, cash equivalents or U.S.
Treasury Securities equal at all times to the amount of the when-issued
commitments will be established and maintained by the Fund at the Fund's
custodian. Additional cash or U.S. Treasury Securities will be added to the
account when necessary. While the Fund will purchase securities on a when-issued
basis only with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date if it is deemed advisable to limit the
effects of adverse market action. The securities so purchased or sold are
subject to market fluctuation and no interest accrues to the Fund during this
period. At the time the Fund makes the commitment to purchase or sell securities
on a when-issued basis, it will record the transaction and thereafter reflect
the value of such security purchased or, if a sale, the proceeds to be received,
in determining its net asset value. At the time of delivery of the securities,
their value may be more or less than the purchase or sale price. The Fund will
ordinarily invest no more than 40% of its net assets at any time in securities
purchased on a when-issued basis.
Futures Contracts
The Fund may engage in securities index futures contracts in
order to obtain exposure to certain market segments, facilitate allocation of
investments among asset classes and for the purposes of hedging the portfolio's
investments. A securities index futures contract obligates the seller to deliver
(and the purchaser to take), effectively, an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
trade is made. No physical delivery of the underlying stocks in the index is
made. Securities index futures contracts ("Futures Contracts") will be entered
on domestic exchanges and boards of trade, subject to applicable Commodities and
Futures Trading Commission ("CFTC") Rules. These transactions may be entered
into for bona fide hedging and other permissible risk management purposes.
Each such Futures Contract provides for a cash payment, equal to
the amount, if any, by which the value of the index at maturity is above or
below the value of the index at the time the contract was entered into, times a
fixed index "multiplier." The index underlying such a Futures Contract is
generally a broad based index of securities designed to reflect movements in the
relevant market as a whole. The index assigns weighted values to the securities
included in the
-4-
<PAGE>
index, and its composition is changed periodically. Futures Contracts have been
designed by exchanges which have been designated as "contract markets" by the
Commodity Futures Trading Commission (the "CFTC"), and must be executed through
a futures commission merchant ("FCM") (i.e. futures broker), which is a member
of the relevant contract market. The exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
In connection with transactions in Futures Contracts, the Fund
will be required to deposit as "initial margin" a specified amount of cash or
short-term U.S. Government securities. The initial margin required for a Futures
Contract is set by the exchange on which the contract is traded
with review and oversight by the CFTC. Thereafter, subsequent payments (referred
to as "variation margin") are made to and from the broker to reflect changes in
the value of the Futures Contract. The Fund will not enter into Futures
Contracts, if immediately thereafter, the sum of the amounts of initial margin
deposits on the Fund's open futures contracts entered into for other than "bona
fide hedging" would exceed 5% of the value of the Fund's total assets.
Although Futures Contracts call for the making or acceptance of a
cash settlement at a specified future time, the contractual obligation is
usually fulfilled before such date by buying or selling, as the case may be, on
a commodities exchange, an identical Futures Contract calling for settlement in
the same month, subject to the availability of a liquid secondary market. The
Fund incurs brokerage fees when it purchases and sells Futures Contracts. The
purpose of the acquisition or sale of a Futures Contract, in the case of a
portfolio such as that of the Fund which holds or intends to acquire equity
securities, is to attempt to protect the Fund from market fluctuations, obtain
exposure to a particular market or market segment without actually buying or
selling securities, and/or facilitate the allocation of investments among asset
classes. For example, if the Fund owns stocks replicating the Wilshire 5000
Index, the Fund might sell index Futures Contracts based on such index as a
hedge against market decline. The use of Futures Contracts as an investment
technique allows the Fund to maintain a hedging position without having to sell
its portfolio securities.
To the extent the Fund enters into Futures Contracts for these
purposes, the assets in the segregated asset account maintained to cover the
Fund's obligations with respect to such Futures Contracts will consist of liquid
assets from its portfolio in an amount equal to the difference between the
fluctuating market value of such Futures Contracts and the aggregate value of
the initial and variation margin payments made by the Fund with respect to such
Futures Contracts.
Participation in the futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. Gains and losses on Futures Contracts, depend on the Advisor's
ability to predict correctly the direction of securities prices, interest rates
and other economic factors. For example, if the Fund has hedged against the
possibility of a market decline and instead the market rises, the Fund will lose
part or all of the benefit of the increased value of its securities portfolio
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities from its portfolio to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may also have to sell
securities at a time when it may be disadvantageous to do so.
Other risks associated with the use of Futures Contracts are (i)
imperfect correlation between the price of Futures Contracts and movements in
the prices of the securities underlying the index or of the securities being
hedged in the case of bona fide hedging strategies; (ii) the fact that skills
needed to use these investment strategies are different from those needed to
select portfolio securities; (iii) the possible absence of a liquid secondary
market for any particular instrument at
-5-
<PAGE>
any particular time; and (iv) the possible need to defer closing out certain
positions to avoid adverse tax consequences. The risk that the Fund will be
unable to close out a futures position will be minimized by only entering into
futures contracts for which there appears to be a liquid exchange or secondary
market. In addition, the possible risk of loss of trading futures contracts in
certain strategies can be substantial, due to both the low margin deposits
required and the high degree of leverage involved in futures pricing.
Various additional risks exist with respect to the trading of
futures. Transactions in these instruments are also subject to the risk of
brokerage firm or clearing house insolvencies. The liquidity of a secondary
market in a Futures Contract may be adversely affected by "daily price
fluctuation limits," established by exchanges, which limit the amount of
fluctuation in the price of a contract during a single trading day and prohibit
trading beyond such limit. In addition, the exchanges on which futures are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). In addition, the ordinary spreads between prices in the cash and
futures markets, due to differences in the natures of those markets, are subject
to distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close out Futures
Contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, from the point of
view of speculators, the margin deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions. Due to the possibility of distortion, a correct forecast of
general market trends by the Advisor may still not result in a successful
transaction.
Other Investments
For temporary, defensive purposes, the Fund may invest up to 100%
of its assets in high quality, short-term money market instruments, and in notes
or bonds issued by the U.S. Treasury Department or by other agencies of the
U.S. Government.
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as federal
limitations. The investment restrictions recited below are in addition to those
described in the Fund's Prospectus, and are matters of fundamental policy and
may not be changed without the affirmative vote of a majority of the outstanding
Shares. The percentage limitations contained in these restrictions apply at the
time of purchase of securities. Accordingly, the Fund will not:
1. Concentrate 25% or more of its total assets in securities of
issuers in any one industry (for these purposes the U.S.
Government, its agencies and instrumentalities are not considered
an industry);
2. With respect to 75% of its total assets, invest more than 5% of
the value of its total assets in the securities of any single
issuer or purchase more than 10% of the outstanding voting
securities of any one issuer, except the U.S. Government, its
agencies and instrumentalities; and
-6-
<PAGE>
3. Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and in an amount not
exceeding 10% of the value of the total assets of the Fund at the
time of such borrowing, provided that, while borrowings by the
Fund equaling 5% or more of the Fund's total assets are
outstanding, the Fund will not purchase securities for
investment;
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts (except
that the Fund may purchase or sell futures contracts based on
underlying securities indexes);
6. Act as an underwriter of securities within the meaning of the
Federal securities laws, except insofar as it might be deemed to
be an underwriter upon disposition of certain portfolio
securities acquired within the limitation on purchases of
restricted securities;
7. Issue senior securities;
8. Make loans, except that the Fund may purchase or hold debt
instruments and may enter into repurchase agreements and make
loans of portfolio securities in accordance with its investment
objective and policies;
The following investment restriction may be changed by a vote of
the majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered under
the Investment Company Act, except as permitted by federal law.
2. Invest more than 15% of the value of its net assets in illiquid
securities.
4. VALUATION OF SHARES AND REDEMPTION
Valuation
The net asset value per Share is determined daily as of the close
of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time)
each day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Redemption
The Fund may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check
as described in the Prospectus. However, if the Board of Directors determines
that it would be in the best interests
-7-
<PAGE>
of the remaining shareholders of the Fund to make payment of the redemption
price in whole or in part by a distribution in kind of readily marketable
securities from the portfolio of the Fund in lieu of cash, in conformity with
applicable rules of the SEC, the Fund will make such distributions in kind. If
Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation" and such valuation will be made as of
the same time the redemption price is determined. The Fund, however, has elected
to be governed by Rule 18f-1 under the Investment Company Act pursuant to which
the Fund is obligated to redeem Shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund during any 90-day period for
any one shareholder.
5. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectus is not intended as a substitute for
careful tax planning.
The following general discussion of federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
Qualification as Regulated Investment Company
The Fund expects to be taxed as a regulated investment company
("RIC") under Subchapter M of the Code. As a RIC, the Fund is exempt from
federal income tax on its net investment income and capital gains which it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (net investment income and the excess of net
short-term capital gains over net long-term capital losses) for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
that are described below. Distributions of investment company taxable income
made during the taxable year or, under certain specified circumstances, within
12 months after the close of the taxable year, will satisfy the Distribution
Requirement. The Distribution Requirement for any year may be waived if a RIC
establishes to the satisfaction of the Internal Revenue Service that it is
unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for federal excise tax
(discussed below).
The Fund may make investments in securities (such as STRIPS) that
bear "original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Fund must distribute to satisfy the
Distribution Requirement. In some cases, the Fund may have to borrow money or
dispose of other investments in order to make sufficient cash distributions to
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, in
order to qualify as a RIC the Fund must generally derive at least 90% of its
gross income from dividends, interest, certain
-8-
<PAGE>
payments with respect to securities, loans and gains from the sale or other
disposition of stock or securities, or from other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in stock or securities (the "Income
Requirement").
Finally, at the close of each quarter of its taxable year, at
least 50% of the value of the Fund's assets must consist of cash and cash items,
U.S. Government securities, securities of other regulated investment companies,
and securities of other issuers (as to which the Fund has not invested more than
5% of the value of its total assets in securities of such issuer and as to which
the Fund does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses or related trades or businesses (the "Asset
Diversification Test"). Generally, the Fund will not lose its status as a RIC if
it fails to meet the Asset Diversification Test solely as a result of a
fluctuation in value of portfolio assets not attributable to a purchase. The
Fund may curtail its investment in certain securities where the application
thereto of the Asset Diversification Test is uncertain.
Although the Fund intends to distribute substantially all of its
net investment income and may distribute its capital gains for any taxable year,
the Fund will be subject to federal income taxation to the extent any such
income or gains are not distributed.
Fund Distributions
The Fund anticipates that it will distribute substantially all of
its investment company taxable in come for each taxable year. Such distributions
will be taxable to shareholders as ordinary income, regardless of whether such
distributions are paid in cash or are reinvested in Shares.
The Fund may either retain or distribute to shareholders the
excess, if any, of net long-term capital gains over net short-term capital
losses ("net capital gains") for each taxable year. If such gains are
distributed as a capital gains distribution, they are taxable to shareholders at
a rate of 20% with respect to shareholders that are individuals regardless of
the length of time the shareholder has held Shares, whether or not such gains
were recognized by the Fund prior to the date on which a shareholder acquired
Shares and whether or not the distribution was paid in cash or reinvested in
Shares. The aggregate amount of distributions designated by the Fund as capital
gains distributions may not exceed the net capital gains of the Fund for any
taxable year, determined by excluding any net capital losses and net long-term
capital losses attributable to transactions occurring after October 31 of such
year and by treating any such net capital losses or net long-term capital losses
as if they arose on the first day of the following taxable year. Conversely, if
the Fund elects to retain its net capital gains, it will be taxed thereon
(except to the extent of any available capital loss carryovers) at the
applicable corporate capital gains tax rate. In such event, it is expected that
the Fund also will elect to have shareholders treated as having received a
distribution of such gains, with the result that shareholders will be required
to report such gains on their returns as capital gains, will receive a
refundable tax credit for their allocable share of capital gains tax paid by the
Fund on the gains, and will increase the tax basis for their Shares by an amount
equal to 65% of the deemed distribution.
In the case of corporate shareholders, Fund distributions (other
than capital gains distributions) generally qualify for the 70% dividends
received deduction to the extent of the gross amount of qualifying dividends
received by the Fund for the year. Generally, and subject to certain
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<PAGE>
limitations, a dividend will be treated as a qualifying dividend if it has been
received from a domestic corporation. For purposes of the alternative minimum
tax and the environmental tax, corporate shareholders generally will be required
to take the full amount of any dividend received from the Fund into account in
determining their adjusted current earnings for purposes of computing
"alternative minimum taxable income."
Investors should be careful to consider the tax implications of
buying Shares of the Fund just prior to the ex-dividend date of an ordinary
income dividend or capital gains distribution. The price of Shares purchased at
that time may reflect the amount of the forthcoming ordinary income dividend or
capital gains distribution. Those purchasing just prior to an ordinary income
dividend or capital gains distribution will be taxable on the entire amount of
the dividend or distribution received even though the dividend or capital gains
distribution was earned by the Fund before the shareholder purchased the Shares.
Generally, gain or loss on the sale of Shares will be capital
gain or loss, which will be long-term capital gain or loss if the Shares have
been held for more than twelve months, and otherwise will be short-term capital
gain or loss. For individuals, long-term capital gains are currently taxed at a
rate of 20% and short-term capital gains are currently taxed at ordinary income
tax rates. However, if any loss is realized upon the sale, exchange or
redemption of Shares held for six months or less and the shareholder has
previously received a capital gains distribution with respect to the Share (or
any undistributed net capital gains of the Fund with respect to such Share are
included in determining the shareholder's long-term capital gains), the
shareholder must treat the loss as a long-term capital loss to the extent any
capital gains distributions have been paid with respect to such Shares (or any
undistributed net capital gains of the Fund with respect to such Shares have
been included in determining the shareholder's long-term capital gains). In
addition, any loss realized on a sale or other disposition of Shares will be
disallowed to the extent an investor repurchases (or enters into a contract or
option to repurchase) Shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the Shares). This loss
disallowance rule will apply to Shares received through the reinvestment of
dividends during the 61-day period.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and
such distributions will be taxable to shareholders as ordinary dividends to the
extent of the Fund's current and accumulated earnings and profits. Such
distributions will be eligible for the dividends received deduction in the case
of corporate shareholders.
The Fund will provide a statement annually to shareholders as to
the federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends received deduction.
The Fund will be required in certain cases to withhold and remit
to the United States Treasury 31% of distributions paid to any shareholder (1)
who has provided either an incorrect tax identification number or no number at
all, (2) who is subject to backup withholding by the Internal Revenue Service
for failure to report the receipt of interest or dividend income properly, or
(3) who has failed to certify to the Fund that he is not subject to backup
withholding.
-10-
<PAGE>
Excise Tax; Miscellaneous Considerations
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that do not distribute in each calendar year an amount
equal to 98% of their ordinary income for the calendar year plus 98% of their
capital gain net income for the one-year period ending on October 31 of such
calendar year. The excise tax is imposed on the undistributed part of this
required distribution. In addition, the balance of such income must be
distributed during the next calendar year to avoid liability for the excise tax
in that year. For the foregoing purposes, a company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. For purposes of the excise tax, a regulated
investment company must reduce its capital gain net income by the amount of any
net ordinary loss for the calendar year (but only to the extent the capital gain
net income for the one-year period ending on October 31 exceeds the net capital
gains for such period). Because the Fund intends to distribute all of its income
currently (or to retain, at most, its "net capital gains" and pay tax thereon),
the Fund does not anticipate incurring any liability for this excise tax.
However, the Fund may, in certain circumstances, be required to liquidate
portfolio investments in order to make sufficient distributions to avoid excise
tax liability.
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of federal, state and local tax rules
affecting an investment in the Fund.
6. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are the responsibility
of the Board of Directors. The Board approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including the
Fund's agreements with its investment advisor, sub-advisor, distributor,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's executive officers, the Advisors, the
Distributor and the Fund's administrator. A majority of the directors of the
Fund have no affiliation with the Advisors, the Distributor or the Fund's
administrator.
Directors and Officers
The Directors and executive officers of the Fund, their
respective dates of birth and their principal occupations during the last five
years are set forth below. Unless otherwise indicated, the address of each
Director and executive officer is 717 Fifth Avenue, New York, New York 10022.
* EDWARD S. HYMAN, Chairman and Director (4/8/45)
Chairman, International Strategy & Investment Inc. (registered
investment advisor), Chairman, ISI Inc. (investments) and Chairman
and President, International Strategy and Investment Group Inc.
(registered investment advisor and registered broker-dealer),
1991-Present.
* TRUMAN T. SEMANS, Vice Chairman and Director (10/27/26)
BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland
21202. Vice Chairman, Alex. Brown Capital Advisory & Trust Company;
Director, Investment Company Capital Corp. (registered investment
advisor) and Virginia Hot Springs, Inc. (property management);
Formerly, Vice Chairman and Managing Director, Alex. Brown & Sons
Incorporated (now BT Alex. Brown Incorporated).
-11-
<PAGE>
JAMES J. CUNNANE, Director (3/11/38)
60 Seagate Drive, Unit P106, Naples, Florida 34103. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly,
Senior Vice President and Chief Financial Officer, General Dynamics
Corporation (defense), 1989-1993, and Director, The Arch Fund
(registered investment company).
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity
Investor and Capital Markets Consultant; Director, The Nevis Fund
(registered investment company). Formerly, President and Chief
Executive Officer, The National Association of Securities Dealers,
Inc. and The NASDAQ Stock Market, Inc., 1987-1997; Chief Operating
Officer of Alex. Brown & Sons Incorporated (now BT Alex. Brown
Incorporated) 1985-1987.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (finance and banking); Chairman of the
Quality Control Inquiry Committee, American Institute of Certified
Public Accountants; Formerly, Trustee, Merrill Lynch Funds for
Institutions, 1991-1993; Adjunct Professor, Columbia
University-Graduate School of Business, 1991-1992; Partner, KPMG
Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Director, Central Bank &
Trust (banking), Key Funds (registered investment companies) and DP
Mann Holdings (insurance); Formerly, Director AMBAC Treasurers Trust
(registered investment company).
* R. ALAN MEDAUGH, Director and President (8/20/43)
President, International Strategy & Investment Inc., 1991-Present.
* MICHAEL J. NAPOLI, JR., Director (10/1/51)
1299 Ocean Avenue, Suite 700, Santa Monica, CA 90401. Vice President
(1991-Present) and Principal (1993-Present), Wilshire Associates
Incorporated; Director of Marketing, Wilshire Asset Management
(1991-Present).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7017; President and
Chief Executive Officer, The Pew Charitable Trusts; Director and
Executive Vice President, The Glenmede Trust Company; Formerly,
Executive Director, The Pew Charitable Trusts.
CARL W. VOGT, ESQ., Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2604. Senior Partner, Fulbright & Jaworski
L.L.P. (law); Director, Yellow Corporation (trucking) and American
Science and Engineering (x-ray detection equipment); Formerly,
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak) and Member,
Aviation System Capacity Advisory Committee (Federal Aviation
Administration).
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<PAGE>
DAVID R. BORGER, Vice President (12/23/48)
Wilshire Associates Incorporated, 1299 Ocean Avenue, Suite 700,
Santa Monica, CA 90401. Vice President and Principal, Wilshire
Associates Incorporated; Director of Research, Asset Management
Division.
CARRIE L. BUTLER, Vice President (5/1/67)
Assistant Vice President, International Strategy & Investment Inc.,
1991-Present.
NANCY LAZAR, Vice President (8/1/57)
Executive Vice President and Secretary, International Strategy &
Investment Inc., 1991-Present.
THOMAS D. STEVENS, Vice President (5/27/49)
Wilshire Associates Incorporated, 1299 Ocean Avenue, Suite 700,
Santa Monica, CA 90401. Senior Vice President and Principal,
Wilshire Associates Incorporated; Chief Investment Officer, Wilshire
Asset Management.
MARGARET M. BEELER, Assistant Vice President (3/1/67)
Assistant Vice President, International Strategy & Investment Inc.,
May 1996-Present; Marketing Representative, U.S. Healthcare, Inc.,
1995-1996; Sales Manager, Donna Maione, Inc., 1994-1995; Sales
Manager, Deborah Wiley California, 1989-1994.
KEITH C. REILLY, Assistant Vice President (6/2/66)
Assistant Vice President, International Strategy & Investment Inc.,
May 1996-Present; Select Private Banking Officer, Assistant
Manager, Chemical Bank, 1995-1996; Financial Consultant, Dreyfus
Corporation, 1989-1995.
AMY M. OLMERT, Secretary (5/14/63)
BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland
21202. Vice President, BT Alex. Brown Incorporated, June,
1997-Present. Formerly, Senior Manager, Coopers & Lybrand L.L.P.
(now PricewaterhouseCoopers LLP), September 1988-June 1997.
JOSEPH A. FINELLI, Treasurer (1/24/57)
BT Alex. Brown Incorporated, One South Street, Baltimore, Maryland
21202. Vice President, BT Alex. Brown Incorporated and Vice
President, Investment Company Capital Corp. (registered investment
advisor), September 1995-Present; Formerly, Vice President and
Treasurer, The Delaware Group of Funds (registered investment
companies) and Vice President, Delaware Management Company, Inc.
(investments), 1980-August 1995.
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<PAGE>
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist,
Putnam Investments Inc. (registered investment companies), April
1994-July 1996; Supervisor, Brown Brother Harriman & Co. (domestic
and global custody), August 1991-April 1994.
______________________
* A Director who is an "interested person" as defined in the
Investment Company Act.
Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed, administered
or advised by BT Alex. Brown Incorporated ("BT Alex. Brown") or any of its
affiliates. There are currently 12 funds in the Flag Investors/ISI Funds and BT
Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hyman
serves as Chairman of four funds in the Fund Complex. Mr. Medaugh serves as a
Director and President of two funds and as President of two other funds in the
Fund Complex. Mr. Semans serves as Chairman of five funds and as a Director of
five other funds in the Fund Complex. Messrs. Cunnane, Levy and McDonald serve
as Directors of each fund in the Fund Complex. Mr. Hardiman serves as Director
of nine funds in the Fund Complex. Ms. Rimel and Mr. Vogt each serve as a
Director of 10 funds in the Fund Complex. Ms. Lazar and Ms. Butler serve as Vice
Presidents of four funds in the Fund Complex. Ms. Beeler and Mr. Reilly each
serve as Assistant Vice President for four funds in the Fund Complex. Ms. Olmert
serves as Secretary, Mr. Finelli serves as Treasurer and Mr. Liotta serves as
Assistant Secretary, respectively, for each of the funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had
normal brokerage transactions with, the Fund's administrator or its affiliates
in the ordinary course of business. All such transactions were made on
substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons. Additional transactions may be expected to
take place in the future.
Officers of the Fund receive no direct remuneration in such
capacity from the Fund. Officers and Directors of the Fund who are officers or
directors of the Advisors, the Distributor or the Fund's administrator may be
considered to have received remuneration indirectly. As compensation for his or
her services as director, each Director who is not an "interested person" of the
Fund (as defined in the Investment Company Act) (an "Independent Director")
receives an aggregate annual fee (plus reimbursement for reasonable
out-of-pocket expenses incurred in connection with his or her attendance at
Board and committee meetings) from all Flag Investors/ISI Funds and BT Alex.
Brown Cash Reserve Fund, Inc. for which such Director serves. In addition, the
Chairman of the Fund Complex's Audit Committee receives an aggregate annual fee
from the Fund Complex. Payment of such fees and expenses is allocated among all
such funds described above in direct proportion to their relative net assets.
For the period from September 16, 1998 (commencement of operations) through May
31, 1998, Independent Directors fees attributable to the assets of the Fund
totaled approximately $123.
The following table shows aggregate compensation and retirement
benefits payable to each of the Fund's Directors by the Fund and Fund Complex,
respectively, and pension or retirement benefits accrued as part of Fund
expenses in the period ended May 31, 1998.
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
______________________________________________________________________________________________________________________
Pension or Total Compensation From
Retirement the Fund and Fund Complex
Aggregate Compensation Benefits Accrued Payable to Directors
Name of Person, For the Period Ended as Part of Fund for the Period Ended
Position May 31, 1998 Expenses May 31, 1998
______________________________________________________________________________________________________________________
<S> <C> <C> <C>
Edward S. Hyman(1) $0 $0 $0
Chairman
Truman T. Semans(1) $0 $0 $0
Vice Chairman
R. Alan Medaugh(1) $0 $0 $0
Director and President
Michael J. Napoli, Jr.(1) $0 $0 $0
Director
James J. Cunnane $17 (4) $39,000 for service on 13(5)
Director Boards in the Fund Complex
Joseph R. Hardiman(2) N/A N/A N/A
Director
John F. Kroeger(3) $21 (4) $49,000 for service on 13(5)
Director Boards in the Fund Complex
Louis E. Levy $17 (4) $39,000 for service on 13(5)
Director Boards in the Fund Complex
Eugene J. McDonald $17 (4) $39,000 for service on 13(5)
Director Boards in the Fund Complex
Rebecca W. Rimel $17 (4) $39,000 for service on 11(5,6)
Director Boards in the Fund Complex
Carl W. Vogt, Esq. $17 (4) $39,000 for service on 11(5,6)
Director Boards in the Fund Complex
</TABLE>
____________________
(1) Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
(2) Appointed effective October 1, 1998.
(3) Retired effective October 1, 1998.
(4) The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
Fund for the period ended May 31, 1998 was $748.
(5) One of these funds ceased operations on July 29, 1998.
(6) Ms. Rimel and Mr. Vogt receive proportionately higher compensation
from each fund for which they serve as a Director.
The Fund Complex has adopted a retirement plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
administrator or their respective affiliates (the "Participants"). After
completion of six years of service, each Participant will be entitled to receive
an annual retirement benefit equal to a percentage of the fee earned by the
Participant in his or her last year of service. Upon retirement, each
Participant will receive annually 10% of such fee for each year that he or she
served after completion of the first five years, up to a maximum annual benefit
of 50% of the fee earned by the Participant in his or her last year of service.
The fee will be paid quarterly, for life, by each Fund for which he or she
serves. The Retirement Plan is unfunded and unvested. Such fees are allocated to
each fund in the Fund Complex based upon the relative net assets of such fund to
the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at December 31, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Levy, 3
years; for Mr. McDonald, 5 years; for Ms. Rimel, 2 years and for Mr. Vogt, 2
years; for Mr. Hardiman, 0 years.
-15-
<PAGE>
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- ------------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $ 4,900 $ 3,900
7 years $ 9,800 $ 7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Levy, McDonald and Vogt and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select from among various Flag Investors, BT Alex. Brown
Cash Reserve Fund, Inc. and BT International Equity Fund in which all or part of
their deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in generally equal
quarterly installments over a period of 10 years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of
Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Code of
Ethics applies to the personal investing activities of the directors and
officers of the Fund, as well as to designated officers, directors and employees
of the Advisors and the Distributor. As described below, the Code of Ethics
imposes additional restrictions on the Advisor's investment personnel, including
the portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that any officer, director, or
employee of the Fund, International Strategy & Investment Group, Inc. or the
Advisor preclear any personal securities investments (with certain exceptions,
such as non-volitional purchases or purchases which are part of an automatic
dividend reinvestment plan). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions applicable
to investment personnel include a ban on acquiring any securities in an initial
public offering, a prohibition from profiting on short-term trading in
securities and special preclearance of the acquisition of securities in private
placements. Furthermore, the Code of Ethics provides for trading "blackout
periods" that prohibit trading by investment personnel and certain other
employees within periods of trading by the Fund in the same security. Officers,
directors and employees of the Advisor and the Distributor may comply with codes
instituted by those entities so long as they contain similar requirements and
restrictions.
-16-
<PAGE>
7. INVESTMENT ADVISORY AND OTHER SERVICES
On June 17, 1997, the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and ISI and a Sub-Advisory Agreement among the Fund, ISI and
Wilshire Associates Incorporated ("Wilshire" or the "Sub-Advisor"), both of
which contracts are described in greater detail below. The Investment Advisory
Agreement and the Sub-Advisory Agreement were approved by the sole shareholder
of the Fund on September 10, 1997. ISI is a registered investment advisor that
was formed in January 1991. ISI employs Messrs. Edward S. Hyman, the Fund's
Chairman, and R. Alan Medaugh, the Fund's President. ISI is also investment
advisor to Total Return U.S. Treasury Fund, Inc., Managed Municipal Fund, Inc.
and North American Government Bond Fund, Inc., open-end management investment
companies with net assets of approximately $460 million as of July 31, 1998.
Wilshire, a California corporation, is a registered investment
advisor with approximately $8.7 billion in net assets under management as of
July 31, 1998. Wilshire currently provides investment advisory services to 1
open-end registered investment company with $266 million of net assets under
management as of July 31, 1998. Wilshire employs as its President and Chief
Executive Officer, Mr. Dennis Tito, who, due to his stock ownership, may be
deemed to be a controlling person of Wilshire.
Under the Investment Advisory Agreement, ISI: (1) formulates and
implements continuing programs for the purchase and sales of securities, (2)
determines what securities (and in what proportion) shall be represented in the
Fund's portfolio (3) provides the Fund's Board of Directors with regular
financial reports and analysis with respect to the Fund's portfolio investments
and operations, and the operations of comparable investment companies, (4)
obtains and evaluates economic, statistical, and financial information pertinent
to the Fund, and (5) takes on behalf of the Fund, all actions which appear to
the Advisor necessary to carry into effect its purchase and sale programs. ISI
has delegated these responsibilities to Wilshire for a portion of the Fund's
portfolio, provided that ISI continues to supervise the performance of Wilshire
and report thereon to the Fund's Board of Directors. Any investment program
undertaken by ISI or Wilshire will at all times be subject to the policies and
control of the Fund's Board of Directors. Neither ISI or Wilshire shall be
liable to the Fund or its shareholders for any act of omission by ISI or
Wilshire or any losses sustained by the Fund or its shareholders except in the
case of willful misfeasance, bad faith, gross negligence, or reckless disregard
of duty. The services of ISI and Wilshire to the Fund are not exclusive and both
ISI and Wilshire are free to render similar services to others.
As compensation for these services, ISI is entitled to receive an
annual fee from the Fund calculated daily and paid monthly, at the annual rate
of 0.40%. of the Fund's daily net asset value. As compensation for its services,
Wilshire is entitled to receive a fee from ISI, payable out of ISI's advisory
fee, calculated daily and payable monthly, at the annual rate of 0.16% of the
Fund's average daily net assets. ISI and Wilshire have voluntarily agreed to
waive their annual fees proportionately to the extent necessary, and ISI has
voluntarily agreed to reimburse expenses to the extent necessary, so that total
operating expenses do not exceed 1.00% of the Fund's average daily net assets.
ISI's compensation under the Investment Advisory Agreement for the period from
September 16, 1997 (commencement of operations) through May 31, 1998 was $0 (net
of fee waivers of $32,924 and reimbursements of $60,048). Wilshire's
compensation under the Sub-Advisory Agreement for such period was $0 (net of fee
waivers of $13,186).
Each of the Investment Advisory and the Sub-Advisory Agreements has
an initial term of two years and will continue in effect from year to year
thereafter if such continuance is specifically approved at least annually by the
Fund's Board of Directors, including a majority of the Independent Directors who
have no direct or indirect financial interest in such agreements, by votes cast
in person at a meeting called for such purpose, or by a vote of a majority of
the outstanding shares (as
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<PAGE>
defined under "Capital Stock"). The Fund or ISI may terminate the Investment
Advisory Agreement on 60 days' written notice without penalty. The Investment
Advisory Agreement will terminate automatically in the event of assignment
(as defined in the Investment Company Act). The Sub-Advisory Agreement has
similar termination provisions.
8. ADMINISTRATION
Investment Company Capital Corp. ("ICC"), One South Street,
Baltimore, Maryland 21202, provides administration services to the Fund. Such
services include: monitoring the Fund's regulatory compliance, supervising all
aspects of the Fund's service providers, arranging, but not paying for, the
printing and mailing of prospectuses, proxy materials and shareholder reports,
preparing and filing all documents required by the securities laws of any state
in which the Shares are sold, establishing the Fund's budgets, monitoring the
Fund's distribution plans, preparing the Fund's financial information and
shareholder reports, calculating dividend and distribution payments and
arranging for the preparation of state and federal tax returns.
As compensation for its administration services, ICC is
entitled to receive an annual fee calculated daily and payable monthly equal to
0.12% of the Fund's average daily net assets. ICC's compensation under the
Agreement for the period from September 16, 1997 (commencement of operations)
through May 31, 1998 was $0 (net of fee waivers of $9,877).
The services of ICC to the Fund are not exclusive and ICC is
free to render similar services to others.
ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. An affiliate of ICC serves
as the Fund's custodian. (See "Custodian, Transfer Agent and Accounting
Services"). ICC is an indirect subsidiary of Bankers Trust Corporation.
9. DISTRIBUTION OF FUND SHARES
International Strategy & Investment Group Inc. ("ISI Group" or
the "Distributor") serves as the exclusive distributor of the Fund's Shares
pursuant to a Distribution Agreement (the "Distribution Agreement"). ISI Group,
a Delaware corporation, is a broker-dealer that was formed in 1991 and is an
affiliate of the Advisor.
The Distribution Agreement provides that ISI Group has the
exclusive right to distribute the Shares either directly or through other
broker-dealers and further provide that ISI Group will: solicit and receive
orders for the purchase of Shares; accept or reject such orders on behalf of the
Fund in accordance with the Fund's currently effective prospectus and transmit
such orders as are accepted to the Fund's transfer agent as promptly as
possible; receive requests for redemption and transmit such redemption requests
to the Fund's transfer agent as promptly as possible; respond to inquiries from
the Fund's shareholders concerning the status of their accounts with the Fund,
provide the Fund's Board of Directors for their review with quarterly reports
required by Rule 12b-1; maintain such accounts, books and records as may be
required by law or be deemed appropriate by the Fund's Board of
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<PAGE>
Directors; and take all actions deemed necessary to carry into effect the
distribution of the Shares. ISI Group has not undertaken to sell any specific
number of Shares. The Distribution Agreement further provides that, in
connection with the distribution of Shares, ISI Group will be responsible for
all of its promotional expenses. The services by ISI Group to the Fund are not
exclusive, and ISI Group shall not be liable to the Fund or its shareholders for
any act or omission by ISI Group or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
As compensation for providing distribution and related
administrative services for the ISI Shares as described above, the Fund will pay
ISI Group , on a monthly basis, an annual fee, equal to 0.25% of the Fund's
average daily net assets. ISI Group expects to allocate on a proportional basis
up to all of its fees to broker-dealers who enter into Agency Distribution
Agreements with ISI Group ("Participating Dealers") under which such
broker-dealers have agreed to process investor purchase and redemption orders
and respond to inquiries from Fund shareholders concerning the status of their
accounts and the operations of the Fund. As compensation for providing
distribution and shareholder services for the period from September 16, 1997
(commencement of operations) through May 31, 1998, ISI Group received $20,578.
Pursuant to Rule 12b-1 under the Investment Company Act, which
provides that investment companies may pay distribution expenses, directly or
indirectly, only pursuant to a plan adopted by the investment company's board of
directors and approved by its shareholders, the Fund has adopted a Plan of
Distribution for the ISI Shares (the "ISI Plan"). Under the ISI Plan, the Fund
pays a fee to ISI Group for distribution and other shareholder servicing
assistance as set forth in the Distribution Agreement, and ISI Group
is authorized to make payments out of its fees to Participating Dealers.
The Distribution Agreement has an initial term of two years.
The Distribution Agreement and the ISI Plan will remain in effect from year to
year as specifically approved (a) at least annually by the Fund's Board of
Directors and (b) by the affirmative vote of a majority of the Independent
Directors, by votes cast in person at a meeting called for such purpose. The
Distribution Agreement, forms of Agency Distribution Agreement and the ISI Plan
were most recently approved by the Fund's Board of Directors, including a
majority of the Independent Directors on September 29, 1998.
In approving the ISI Plan, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable likelihood
that the ISI Plan would benefit the Fund and its shareholders. The ISI Plan will
be renewed only if the Directors make a similar determination in each subsequent
year. The ISI Plan may not be amended to increase materially the fee to be paid
pursuant to the Distribution Agreement without the approval of the Fund's
shareholders. The ISI Plan may be terminated at any time, and the Distribution
Agreement may be terminated at any time upon 60 days' notice, without penalty,
by a vote of a majority of the Fund's Independent Directors or by a vote of a
majority of the outstanding Shares. Any Agency Distribution Agreement may be
terminated in the same manner at any time. The Distribution Agreement and any
Agency Distribution Agreement shall automatically terminate in the event of
assignment.
During the continuance of the ISI Plan, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the ISI Plan to ISI Group pursuant to
the Distribution Agreement, to Participating Dealers
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<PAGE>
pursuant to Agency Distribution Agreements and to Shareholder Servicing Agents
pursuant to Shareholder Servicing Agreements. Such reports shall be made by the
persons authorized to make such payments. In addition, during the continuance of
the ISI Plan, the selection and nomination of the Fund's Independent Directors
shall be committed to the discretion of the Independent Directors then in
office.
In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which ISI Group will allocate a
portion of its distribution fee as compensation for such financial institutions'
ongoing shareholder services. Although banking laws and regulations prohibit
banks from distributing shares of open-end investment companies such as the
Fund, according to interpretations from various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit or
restrict the activities of the Shareholder Servicing Agents in connection with
the Shareholder Servicing Agreements, the Fund may be required to alter
materially or discontinue its arrangements with the Shareholder Servicing
Agents. Such financial institutions may impose separate fees in connection with
these services and investors should review the applicable Prospectus and this
Statement of Additional Information in conjunction with any such institution's
fee schedule.
Under the ISI Plan, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to the
Distributor, with respect to shares held by or on behalf of customers of such
entities. Payments under the ISI Plan are made as described above regardless of
the Distributor's actual cost of providing distribution services and may be used
to pay the Distributor's overhead expenses. If the cost of providing
distribution services to the Fund in connection with the sale of the ISI Shares
is less than 0.25% of the ISI Shares' average daily net assets for any period,
the unexpended portion of the distribution fee may be retained by the
Distributor. The ISI Plan does not provide for any charges to the Fund for
excess amounts expended by the Distributor and, if the ISI Plan is terminated in
accordance with its terms, the obligation of the Fund to make payments to the
distributor pursuant to the ISI Plan will cease and the Fund will not be
required to make any payments past the date the Distribution Agreement
terminates. In return for payments received pursuant to the ISI Plan, ISI will
pay the distribution-related expenses of the ISI Class including one or more of
the following: advertising expenses; printing and mailing of prospectuses to
other than current shareholders; compensation to dealers and sales personnel;
and interest, carrying or other financing charges.
For the period from September 16, 1997 (commencement of
operations) through May 31, 1998, ISI Group was paid commissions of $19,311 and
from that amount retained $0.
Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory, administration and distribution fees; the charges and
expenses of any registrar, any custodian or depository appointed by the Fund for
the safekeeping of cash, portfolio securities and other property, and any
transfer, dividend or accounting agent or agents appointed by the Fund; brokers'
commissions, if any, chargeable to the Fund in connection with portfolio
securities transactions to which the Fund is a party; all taxes, including
securities issuance and transfer taxes, and corporate fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing of certificates representing Shares; all costs and
expenses in connection with the maintenance of registration of the Fund and its
Shares with the SEC and various states and other jurisdictions (including filing
fees, legal fees and disbursements of counsel); the costs and expenses of
printing, including typesetting and distributing prospectuses of the Fund and
supplements thereto to the shareholders; all expenses of shareholders' and
Directors' meetings and of preparing,
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<PAGE>
printing and mailing proxy statements and reports to shareholders; fees and
travel expenses of Independent Directors and Independent members of any advisory
board or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel or independent auditors, in connection with any matter
relating to the Fund; membership dues of industry associations; interest payable
on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Fund's operation unless otherwise explicitly
assumed by the Advisors, the Distributor or the Fund's administrator.
10. BROKERAGE
ISI and Wilshire, subject to the supervision of ISI, are each
responsible for decisions to buy and sell securities for a portion of the Fund's
portfolio, for broker-dealer selection and for negotiation of commission rates.
Purchases and sales of securities on a securities exchange are
effected through broker-dealers who charge a commission for their services.
Brokerage commissions are subject to negotiation between the Advisors and the
broker-dealers. The Advisors may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, ISI Group.
In over-the-counter transactions, orders are placed directly
with a principal market maker and such purchases normally include a mark up over
the bid to the broker-dealer based on the spread between the bid and asked price
for the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with ISI
Group in any transaction in which ISI Group acts as a principal.
The Advisors' primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, the Advisors may, in their discretion,
effect agency transactions with broker-dealers that furnish statistical,
research or other information or services which are deemed by the Advisors to be
beneficial to the Fund's investment program. Certain research services furnished
by broker-dealers may be useful to the Advisors with clients other than the
Fund. Similarly, any research services received by the Advisors through
placement of portfolio transactions of other clients may be of value to the
Advisors in fulfilling their obligations to the Fund. No specific value can be
determined for research and statistical services furnished without cost to the
Advisors by a broker-dealer. The Advisors are of the opinion that because the
material must be analyzed and reviewed by their staffs, its receipt does not
tend to reduce expenses, but may be beneficial in supplementing the Advisors'
research and analysis. Therefore, it may tend to benefit the Fund by improving
the Advisors' investment advice. In over-the-counter transactions, the Advisors
will not pay any commission or other remuneration for research services. The
Advisors' policy is to pay a broker-dealer higher commissions for particular
transactions than might be charged if a different broker-dealer had been chosen
when, in the Advisors' opinion, this policy furthers the overall objective of
obtaining best price and execution. Subject to periodic review by the Fund's
Board of Directors, the Advisors are also authorized to pay broker-dealers
higher commissions on brokerage transactions for the Fund in order to secure
research and investment services described above. However, Wilshire has no
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<PAGE>
current intention to do so. The allocation of orders among broker-dealers and
the commission rates paid by the Fund will be reviewed periodically by the
Board. The foregoing policy under which the Fund may pay higher commissions to
certain broker-dealers in the case of agency transactions, does not apply to
transactions effected on a principal basis.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions through ISI Group. At the
time of such authorization, the Board adopted certain policies and procedures
incorporating the standards of Rule 17e-1 under the Investment Company Act which
requires that the commissions paid ISI Group must be "reasonable and fair
compared to the commission, fee or other remuneration received or to be received
by other brokers in connection with comparable transactions involving similar
securities during a comparable period of time." Rule 17e-1 also contains
requirements for the review of such transactions by the Board of Directors and
requires the Advisors to furnish reports and to maintain records in connection
with such reviews. The Distribution Agreement does not provide for any reduction
in the distribution fee to be received by ISI Group from the Fund as a result of
profits from brokerage commissions on transactions of the Fund effected through
ISI Group.
The Advisors manage other investment accounts. It is possible
that, at times, identical securities will be acceptable for the Fund and one or
more of such other accounts; however, the position of each account in the
securities of the same issuer may vary and the length of time that each account
may choose to hold its investment in such securities may likewise vary. The
timing and amount of purchase by each account will also be determined by its
cash position. If the purchase or sale of securities consistent with the
investment policies of the Fund or one or more of these accounts is considered
at or about the same time, transactions in such securities will be allocated
among the accounts in a manner deemed equitable by the Advisors. The Advisors
may combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable execution.
Such simultaneous transactions, however, could adversely affect the ability of
the Fund to obtain or dispose of the full amount of a security which it seeks to
purchase or sell.
The Fund is required to identify any securities of its "regular
brokers or dealers" (as such term is defined in the Investment Company Act)
which the Fund has acquired during its most recent fiscal year. As of May 31,
1998, the Fund held a 5.40% repurchase agreement issued by Goldman Sachs &
Company valued at $1,142,000, 600 shares of Morgan Stanley, Dean Witter,
Discover & Co. valued at $46,837 and 1,039 shares of Travelers Group, Inc.,
parent company of Smith Barney, valued at $63,379.
11. CAPITAL SHARES
Under the Fund's Articles of Incorporation, the Fund may issue up
to 25 million Shares of its capital stock with a par value of $.001 per Share.
The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of Shares by the Directors
at any time without shareholder approval. The Fund currently has one Series and
one class of shares: ISI Strategy Fund Shares. All Shares of the Fund regardless
of class have equal rights with respect to voting, except that with respect to
any matter affecting the rights of the holders of a particular series or class,
the holders of each series or class will vote separately. Any such series will
be a separately managed portfolio and shareholders of each series or class will
have an undivided interest in the net assets of that series. For tax purposes,
the series will be treated as separate entities. Generally, each class of Shares
issued by a particular series will be identical to every other class and
expenses of the Fund (other
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<PAGE>
than 12b-1 fees and any applicable service fees) are prorated between all
classes of a series based upon the relative net assets of each class. Any
matters affecting any class exclusively will be voted on by the holders of such
class.
Shareholders of the Fund do not have cumulative voting rights,
and, therefore, the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund.
The Fund's By-laws provide that any director of the Fund may be
removed by the shareholders by a vote of a majority of the votes entitled to be
cast for the election of Directors. A meeting to consider the removal of any
Director or Directors of the Fund will be called by the Secretary of the Fund
upon the written request of the holders of at least one-tenth of the outstanding
Shares of the Fund entitled to vote at such meeting.
There are no preemptive, conversion or exchange rights applicable
to any of the Shares. The Fund's issued and outstanding Shares are fully paid
and non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of Shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information, the term
"majority of the outstanding Shares" means the vote of the lesser of (i) 67% or
more of the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
12. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors.
13. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company, 130 Liberty Street, New York, New York
10006 ("Bankers Trust") has been retained to act as custodian of the Fund's
investments. Bankers Trust receives such compensation from the Fund for its
services as custodian as may be agreed to from time to time by Bankers Trust and
the Fund. For the period from September 22, 1997 to March 31, 1998, Bankers
Trust was paid $570 as compensation for providing custody services. Investment
Company Capital Corp., One South Street, Baltimore, Maryland 21202 (telephone:
(800) 882-8585) has been retained to act as the Fund's transfer and dividend
disbursing agent. As compensation for these services, ICC receives up to $16.20
per account per year plus reimbursement for out-of-pocket expenses incurred in
connection therewith.
ICC also provides accounting services to the Fund. As
compensation for these services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly, as shown below. For such services for the
period from September 16, 1997 (commencement of operations) through May 31,
1998, ICC received a fee of $10,103.
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<PAGE>
Average Daily Net Assets Incremental Annual Accounting Fee
------------------------ ---------------------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for certain
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services under the Master Services Agreement.
14. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by the
Fund's independent auditors, Deloitte & Touche LLP.
15. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
16. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, as of July 8, 1998, the following
persons owned beneficially or of record 5% or more of the Fund's outstanding
shares:
Edward S. Hyman, Jr. 11.98%
c/o ISI Funds
717 5th Avenue
New York, NY 10022-8101
As of July 22, to Fund management's knowledge, Directors and
officers as a group owned 15.58% of the Fund's total outstanding Shares of the
ISI Shares class.
17. PERFORMANCE COMPUTATIONS
For purposes of quoting and comparing the performance of the Fund
to that of other open-end diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return.
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<PAGE>
The total return quotations, under the rules of the SEC, must
be calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1,5 or 10)
ERV = ending redeemable value at the end of the 1-, 5- or 10-year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1-, 5- or 10-year
periods.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one-, five- and ten-year periods or a shorter period dating from the
effectiveness of the Fund's registration statement or the date the Fund (or a
series) commenced operations.
Calculated according to SEC rules, the ending redeemable value and
total return of a hypothetical $1000 payment for the period from September 16,
1997 (commencement of operations through May 31, 1998) were as follows:
________________________________________________________________________________
Class Ending Redeemable Value Total Return
________________________________________________________________________________
ISI Class $1,060.66 8.64%
________________________________________________________________________________
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper Analytical Services, Inc., the Fund calculates its
aggregate and average annual total return for the specified periods of time by
assuming the investment of $10,000 in Shares and assuming the reinvestment of
each dividend or other distribution at net asset value on the reinvestment date.
For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges. The Fund will, however, disclose
the maximum sales charges and will also disclose that the performance data does
not reflect sales charges and that inclusion of sales charges would reduce the
performance quoted. Such alternative total return information will be given no
greater prominence in such advertising than the information prescribed under SEC
rules, and all advertising containing performance data will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less that their original
cost.
The Fund's annual portfolio turnover rate may vary from year to year,
as well as within a year, depending on market conditions. For the period from
September 16, 1997 (commencement of operations) through May 31, 1998, the Fund's
portfolio turnover rate was 20.08%.
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<PAGE>
18. FINANCIAL STATEMENTS
See next page.
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<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- 58.7%
AEROSPACE -- 0.9%
B.F. Goodrich Company 210 $ 10,762
The Boeing Company 900 42,863
Coltec Industries* 100 2,231
General Dynamics Corporation 100 4,444
Lockheed Martin Corporation 200 22,450
OEA, Inc. 100 1,713
Raytheon Company - Class B 300 16,406
Rockwell International Corporation 200 11,000
Sundstrand Corporation 100 6,200
Textron, Inc. 200 14,838
TRW, Inc. 100 5,356
United Technologies Corporation 200 18,800
-----------
157,063
-----------
AIR TRANSPORTATION -- 0.4%
AAR Corporation 300 7,931
Airborne Freight Corporation 200 7,450
Alaska Airgroup Incorporated* 100 4,631
AMR Corporation* 100 15,394
ASA Holdings, Inc. 100 3,931
Comair Holdings, Inc. 200 5,325
Delta Air Lines, Inc. 100 11,500
FDX Corporation* 100 6,413
PS Group Holdings, Inc.* 100 1,294
Skywest, Inc. 100 4,325
US Airways Group, Inc.* 100 7,000
-----------
75,194
-----------
APPAREL -- 0.4%
Deckers Outdoor Corporation* 100 725
Fabri-Centers of America* 400 11,800
Fruit of the Loom, Inc.* 100 3,594
J.W. Mays, Inc. 100 1,238
Liz Claiborne, Inc. 100 5,069
Nautica Enterprises, Inc.* 100 2,925
NIKE, Inc. Class B 300 13,800
Quaker Fabric Corporation* 100 2,662
Reebok International Ltd.* 100 2,875
S&K Famous Brands, Inc.* 100 1,825
Springs Industries, Inc. - Class A 100 5,613
Unifi, Inc. 100 3,894
VF Corporation 100 5,319
Warnaco Group - Class A 100 4,125
-----------
65,464
-----------
BANKS -- 5.1%
Amsouth Bancorporation 150 5,766
The Bank of New York Company, Inc. 400 24,450
Banc One Corporation 650 35,831
27
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
BANKS -- continued
BankAmerica Corporation 700 $ 57,881
BankBoston Corporation 100 10,538
Bankers Trust Corporation 100 12,350
BB&T Corporation 100 6,619
Carolina First Corporation 100 2,762
CCB Financial Corporation 100 10,950
Chase Manhattan Corporation 400 54,375
Citicorp 400 59,650
Comerica, Inc. 150 9,863
Commerce Bancorp, Inc. 5 278
Commerce Bancshares, Inc. 100 4,862
Community Banks, Inc. 150 3,788
Compass Bancshares, Inc. 100 4,747
Crestar Financial Corporation 100 5,744
Fifth Third Bancorp 300 14,775
First American Corporation 100 4,637
First Chicago NBD Corporation 300 26,231
First Financial Bancorp 100 5,738
First Security Corporation 100 2,275
First Tennessee & National Corporation 100 3,175
First Union Corporation 924 51,109
First Virginia Banks, Inc. 100 5,225
Firstar Corporation 100 3,669
Firstmerit Corporation 100 2,806
Fleet Financial Group, Inc. 300 24,600
Franchise Finance Corporation
of America 100 2,600
Greenpoint Financial Corporation 100 4,119
Hibernia Corporation - Class A 100 2,100
Huntington Bancshares, Inc. 200 6,550
J. P. Morgan & Company Incorporated 200 24,837
KeyCorp 400 15,175
Keystone Financial, Inc. 100 3,900
Little Falls Bancorp, Inc. 100 2,063
Marshall & Isley Corporation 100 5,400
Mellon Bank Corporation 200 13,487
Mercantile Bancorporation 100 5,113
Mercantile Bankshares Corporation 100 3,563
National Bancorp of Alaska, Inc. 400 12,750
National City Bancshares, Inc. 210 8,413
National City Corporation 320 21,680
NationsBank Corporation 918 69,538
North Fork Bancorp, Inc. 150 3,609
Northern Trust Corporation 100 7,053
Norwest Corporation 700 27,213
Old Kent Financial Corporation 100 3,987
Pacific Century Financial Corporation 100 2,506
28
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
BANKS-- continued
Peoples Bank Bridgeport 100 $ 3,813
PNC Bank Corp 300 17,325
Popular, Inc. 100 6,937
Provident Bankshares Corporation 105 3,281
Provident Financial Group, Inc. 200 10,238
Regions Financial Corporation 100 4,113
Republic New York Corporation 100 12,844
Southtrust Corporation 150 6,084
Southwest Bancorporation of Texas* 100 3,938
Star Banc Corporation 100 6,100
State Street Corporation 200 13,787
Summit Bancorporation 200 10,025
SunTrust Banks, Inc. 200 15,800
Synovus Financial Corporation 150 3,366
Trustmark Corporation 100 2,138
U.S. Bancorp 700 27,387
Union Planters Corporation 100 5,850
Unionbancal Corporation 100 9,763
UST Corporation 100 2,781
Wachovia Corporation 200 16,012
Wells Fargo & Company 100 36,150
Wilmington Trust Corporation 100 6,063
Zions Bancorporation 100 5,100
-----------
929,245
-----------
BUSINESS MACHINES -- 3.9%
3Com Corporation* 300 7,613
Adaptec, Inc.* 100 1,519
Adobe Systems, Inc. 100 3,994
Bay Networks, Inc.* 200 5,537
BMC Software, Inc.* 400 18,425
Cabletron Systems, Inc.* 200 2,575
Centigram Communications
Corporation* 500 6,187
Ceridian Corporation* 100 5,400
Cirrus Logic, Inc.* 100 1,000
Cisco Systems, Inc.* 950 71,844
Compaq Computer Corporation 1,400 38,238
Compuware Corporation* 200 9,187
Concord EFS, Inc.* 200 6,375
Data Dimensions, Inc.* 300 4,238
Davox Corporation* 100 1,837
Dell Computer Corporation* 600 49,444
Diebold, Inc. 100 2,925
Digital Equipment Corporation* 200 10,975
Gateway 2000, Inc.* 200 9,012
Honeywell, Inc. 100 8,394
Informix Corporation 100 681
29
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
BUSINESS MACHINES -- continued
Integrated Device Technology, Inc.* 100 $ 937
International Business Machines
Corporation 900 105,638
Komag, Inc. 100 987
Lexmark International Group, Inc. -
Class A* 100 5,550
MicroAge, Inc.* 200 2,700
Microchip Technology, Inc.* 100 2,450
Micron Electronics, Inc.* 100 1,063
Microsoft Corporation* 2,300 195,069
NCR Corporation* 100 3,394
Network Appliance, Inc.* 100 3,478
Novellus Systems, Inc.* 100 3,781
Oracle Corporation* 900 21,263
Pitney Bowes, Inc. 300 14,100
Platinum Technology, Inc.* 100 2,737
Seagate Technology, Inc.* 100 2,313
Shiva Corporation* 100 937
Sigma Designs, Inc.* 1,000 4,250
Sterling Commerce, Inc.* 100 3,969
Sterling Software, Inc.* 100 2,719
Storage Technology Corporation* 100 8,387
Sun Microsystems, Inc.* 400 16,025
Sybase, Inc.* 100 800
Tech Data Corporation* 200 8,125
Telxon Corporation 100 3,325
Total System Services, Inc. 150 3,131
Wang Laboratories, Inc.* 100 2,400
Xerox Corporation 300 30,825
-----------
715,753
-----------
BUSINESS SERVICES -- 2.7%
ABR Information Services, Inc.* 100 2,563
Accustaff, Inc.* 100 3,294
A.C. Nielsen Corporation* 100 1,287
Allied Waste Industries, Inc.* 100 2,650
America Online, Inc.* 200 16,663
American Management Systems, Inc.* 100 2,712
Aspen Technology, Inc.* 100 4,453
At Home Corporation* 100 3,475
Automatic Data Processing, Inc. 300 19,088
BEA Systems, Inc.* 100 2,006
Browning-Ferris Industries 100 3,556
Caribiner International, Inc.* 100 2,213
CDI Corporation* 100 3,681
CheckFree Holdings Corporation* 100 2,269
Cintas Corporation 100 4,569
Citrix Systems, Inc.* 150 7,828
Cognizant Corporation 200 10,650
30
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
BUSINESS SERVICES-- continued
Computer Associates International, Inc. 550 $ 28,875
Computer Sciences Corporation* 200 10,388
Corrections Corporation of America* 100 2,275
Credit Acceptance Corporation* 100 1,031
Cytec Industries, lnc.* 200 9,800
Deluxe Corporation 100 3,356
DeVry, Inc.* 100 3,981
DST Systems, Inc.* 200 10,575
Dun & Bradstreet Corporation* 100 3,375
Ecolab, Inc. 100 3,088
Equifax, Inc. 100 3,637
First Data Corporation 400 13,300
Fiserv, Inc.* 100 5,897
FORE Systems, Inc.* 100 2,200
Forrester Research, Inc.* 100 3,525
Great Plains Software, Inc.* 100 3,650
GT Interactive Software Corporation* 100 937
H&R Block, Inc. 100 4,400
HBO & Company 200 11,544
Hudson General Corporation 100 4,812
IDX Systems Corporation* 100 4,206
Information Resources, Inc.* 100 1,750
Integrated Circuit Systems, Inc.* 100 1,378
Interpublic Group of Companies, Inc. 100 5,931
J.D. Edwards & Company* 100 3,678
Jacobs Engineering Group, Inc.* 100 3,213
Keane, Inc.* 100 4,488
Labor Ready, Inc.* 100 3,381
Laidlaw Environmental Services, Inc. 280 1,085
Lanvision Systems, Inc.* 100 350
Lason Holdings, Inc.* 300 12,188
Level 8 Systems, Inc.* 100 1,150
Logic Works, Inc.* 100 1,500
Manpower, Inc. 100 4,294
Medaphis Corporation* 100 750
MemberWorks, Inc.* 100 2,725
Mentor Corporation 300 7,941
Metamor Worldwide, Inc.* 100 3,003
Morrison Health Care, Inc. 100 1,712
National Service Industries 200 10,200
Network Associates, Inc.* 100 6,125
NFO Worldwide, Inc.* 100 1,700
Offshore Logistics, Inc.* 100 2,038
Olsten Corporation 100 1,244
Omnicom Group, Inc. 200 9,362
Online System Services, Inc.* 100 1,363
Open Market, Inc.* 100 1,619
Parametric Technology Corporation* 200 6,131
31
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
BUSINESS SERVICES -- continued
Paychex, Inc. 150 $ 5,400
PeopleSoft, Inc.* 300 13,106
Peregrine Systems, Inc.* 100 2,063
Pre-Paid Legal Services, Inc.* 100 3,550
Preview Travel, Inc.* 100 2,837
Programmer's Paradise, Inc.* 600 5,850
Project Software & Development, Inc.* 100 2,250
Protein Design Labs, Inc.* 100 2,513
PSW Technologies, Inc.* 100 606
Puma Technologies, Inc.* 100 600
Republic Industries, Inc.* 300 7,387
Reynolds and Reynolds Company 100 2,094
Robert Half International, Inc.* 100 5,063
Rural/Metro Corporation* 100 2,362
ServiceMaster Company 100 3,306
Siebel Systems, Inc.* 100 2,275
SS&C Technologies, Inc.* 700 11,550
Stratasys, Inc.* 500 4,750
Sungard Data Systems, Inc.* 100 3,413
Symantec Corporation* 100 2,387
Synopsys, Inc.* 100 4,294
Syntel, Inc.* 50 1,184
Tier Technologies, Inc.* 100 1,837
Transworld Home Healthcare, Inc.* 700 4,550
True North Communications, Inc. 100 3,181
Unisource Worldwide, Inc. 100 1,281
USA Waste Services, Inc.* 300 14,156
USWEB Corporation* 100 2,113
Verisign, Inc.* 100 3,194
Viad Corporation 100 2,700
Visio Corporation* 100 4,687
Walker Interactive Systems, Inc.* 100 1,575
Waste Management, Inc. 400 13,000
Westpoint Stevens, Inc.* 100 3,275
Yahoo!, Inc.* 100 10,950
York Research Corporation* 1,100 7,563
-----------
491,010
-----------
CHEMICALS -- 1.6%
Air Products and Chemicals, Inc. 100 8,700
Airgas, Inc.* 100 1,519
Albemarle Corporation 100 2,431
BetzDearborn, Inc. 100 4,925
Cabot Corporation 100 3,331
Crompton & Knowles Corporation 100 2,694
The Dow Chemical Company 200 19,375
E.I. duPont de Nemours and Company 1,100 84,700
Eastman Chemical Company 100 6,700
32
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
CHEMICALS-- continued
Ethyl Corporation 100 $ 706
Ferro Corporation 100 2,863
Hercules, Inc. 100 4,406
International Specialty Products, Inc.* 100 1,731
JLM Industries, Inc.* 100 1,175
Lubrizol Corporation 100 3,475
Lyondell Petrochemical 100 3,119
Millenium Chemicals, Inc. 100 3,163
Minnesota Mining and Manufacturing
Company 400 37,050
Monsanto Company 500 27,687
Morton International, Inc. 100 3,044
OXiGENE, Inc.* 400 5,250
PPG Industries, Inc. 300 21,863
Praxair, Inc. 200 9,863
Rohm & Haas Company 100 10,987
RPM, Inc. 100 1,700
Solutia, Inc. 100 2,744
Synthetech, Inc. 1,100 7,287
Twinlab Corporation* 100 3,713
W.R. Grace & Company* 100 1,856
Witco Corporation 100 3,794
-----------
291,851
-----------
CONSTRUCTION -- 0.4%
ALYN Corporation* 100 800
Apogee Enterprises, Inc. 100 1,393
Centex Corporation 100 3,575
Clayton Homes, Inc. 100 1,881
Fluor Corporation 100 4,769
Interface, Inc. 100 3,919
Johns Manville Corporation 100 1,450
Justin Industries, Inc. 100 1,587
Lafarge Corporation 100 3,763
Lawson Products, Inc. 100 2,713
Masco Corporation 200 11,250
Medusa Corporation 100 5,763
Owens Corning 100 3,750
Palm Harbor Homes, Inc.* 100 4,169
Puerto Rican Cement Company, Inc. 100 5,344
Republic Group, Inc. 100 1,905
Sherwin-Williams Company 200 6,650
Stanley Works 100 4,750
Toll Brothers, Inc.* 300 7,725
United Mobile Homes, Inc. 100 1,125
Walter Industries, Inc.* 100 1,913
WestTeleservices Corporation* 100 1,375
-----------
81,569
-----------
33
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
CONSUMER DURABLES: 0.4%
Bassett Furniture Industries, Inc. 300 $ 9,150
Black & Decker Corporation 100 5,837
Craig Corporation* 100 1,300
Hillenbrand Industries 100 6,175
Kimball International, Inc. Class B 100 2,463
Linens 'n Things, Inc.* 200 6,425
Maytag Corporation 100 5,043
Newell Company 200 9,650
RF Monolithics, Inc.* 100 1,163
Shaw Industries, Inc. 100 1,600
Sunbeam Corporation 100 2,294
Viking Office Products, Inc.* 100 2,859
Windmere-Durable Holdings, Inc.* 400 12,675
-----------
66,634
-----------
CONTAINERS -- 0.2%
Crown Cork & Seal Company, Inc. 200 10,375
Gaylord Container Corporation* 100 837
Owens-Illinois, Inc.* 100 4,494
Sealed Air Corporation* 54 2,868
Stone Container Corporation* 400 7,100
U.S. Can Corporation* 100 1,694
-----------
27,368
-----------
COSMETICS -- 1.3%
Alberto-Culver Company 100 2,975
Avon Products, Inc. 100 8,181
Clorox Company 100 8,350
Colgate-Palmolive Company 300 26,100
The Dial Corporation 300 7,444
Estee Lauder Companies, Inc. 100 6,387
Gillette Corporation 500 58,563
Procter & Gamble Company 1,300 109,119
ThermoLase Corporation* 500 3,094
-----------
230,213
-----------
DOMESTIC OIL -- 0.7%
Amerada Hess Company 100 5,406
Ashland, Inc. 100 4,987
Atlantic Richfield Company 300 23,663
Benton Oil & Gas Company* 100 1,044
Callon Petroleum Corporation* 100 1,650
Chesapeake Energy Corporation 100 431
Costilla Energy, Inc.* 500 5,375
Cross Timbers Oil Company 100 1,731
Diamond Offshore Drilling, Inc. 200 9,563
Fieldworks, Inc.* 100 388
Global Industries Ltd.* 100 2,131
Holly Corporation 100 2,738
Magellan Petroleum Corporation* 300 712
34
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
DOMESTIC OIL-- continued
Midcoast Energy Resources, Inc. 110 $ 2,503
Oryx Energy Company* 100 2,331
Phillips Petroleum Company 200 10,013
Pool Energy Services Company* 100 2,038
Pride International, Inc.* 100 2,243
R&B Falcon Corporation* 100 2,869
Santa Fe Energy Resources, Inc.* 100 994
Seven Seas Petroleum, Inc.* 100 2,538
St. Mary Land & Exploration Company 100 2,725
Sun Company 100 4,250
Tosco Corporation 100 3,174
Trans Montaigne Oil Company* 100 1,619
Transocean Offshore, Inc. 100 4,931
Union Pacific Resources Group, Inc. 100 2,025
Unocal Corporation 200 7,125
UNOVA, Inc.* 100 2,213
USX-Marathon Group 300 10,500
-----------
123,910
-----------
DRUGS AND MEDICINE -- 6.2%
Abbott Laboratories 700 51,931
Aetna, Inc. 100 7,819
Allegiance Corporation 100 5,000
Allergan, Inc. 100 4,200
ALZA Corporation* 100 4,838
American Home Products
Corporation 1,200 57,975
Amerisource Health Corporation -
Class A* 100 5,437
Amgen, Inc.* 300 18,150
Arrow International, Inc. 100 3,456
Arterial Vascular Engineering, Inc.* 100 3,091
Barr Laboratories, Inc.* 100 4,081
Bausch & Lomb, Inc. 100 4,981
Baxter International, Inc. 300 17,156
Becton, Dickinson and Company 100 7,075
Bergen Brunswig Corporation 200 8,300
Beverly Enterprises, Inc.* 100 1,431
Biogen, Inc.* 100 4,400
Biomet, Inc. 100 2,888
Boston Scientific Corporation* 200 12,750
Bristol-Myers Squibb Company 900 96,750
C.R. Bard, Inc. 100 3,469
Cardinal Health, Inc. 100 8,913
Care Matrix Corporation* 100 2,312
Carter-Wallace, Inc. 400 7,125
Centocor, Inc.* 100 3,900
Chiron Corporation 100 1,806
Columbia/HCA Healthcare Corporation 600 19,613
Covance, Inc.* 100 2,119
35
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
DRUGS AND MEDICINE -- continued
DePuy, Inc. 100 $ 2,987
Eli Lilly and Company 1,000 61,438
First Health Group Corporation* 200 11,362
Forest Laboratories, Inc.* 100 3,300
Foundation Health Systems, Inc.* 100 3,044
Genentech, Inc.* 200 13,800
Gensia Sicor, Inc.* 100 425
Genzyme Corporation
(General Division)* 100 2,737
Guidant Corporation 200 12,888
Health Management Associates, Inc.* 200 5,963
HEALTHSOUTH Corporation* 400 11,350
Humana, Inc. 100 3,106
ICN Pharmaceuticals, Inc. 100 4,319
Inhale Therapeutic Systems* 100 3,300
Ivax Corporation* 100 900
Johnson & Johnson 1,300 89,781
Mallinckrodt, Inc. 100 3,081
Manor Care, Inc. 100 3,156
McKesson Corporation 100 7,813
Med Partners, Inc.* 100 894
Medtronic, Inc. 400 22,250
Merck & Co., Inc. 1,100 128,769
Mylan Laboratories 100 3,000
Oakley, Inc.* 100 1,306
Omnicare, Inc. 100 3,506
Oxford Health Plans, Inc.* 100 1,725
PAREXEL International Corporation* 200 6,000
Perrigo Company* 100 1,100
Pfizer, Inc. 1,200 125,775
Pharmerica, Inc. 100 1,219
PhyCor, Inc.* 100 1,687
PSS World Medical, Inc.* 100 1,250
Quintile Transnational Corporation* 100 4,863
Quorum Health Group, Inc.* 100 3,006
Schering-Plough Corporation 700 58,581
Scios, Inc. 100 937
Sola International, Inc.* 100 3,956
Specialty Care Network, Inc.* 100 988
St. Jude Medical, Inc.* 100 3,575
SteriGenics International, Inc.* 200 4,100
Stryker Corporation 100 4,075
Sunrise Assisted Living, Inc.* 100 3,012
Sybron International Corporation* 300 7,181
Tenet Healthcare Corporation* 100 10,500
Total Renal Care Holdings, Inc.* 300 9,206
United Healthcare Corporation 200 12,800
United States Surgical Corporation 100 3,975
36
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
DRUGS AND MEDICINE-- continued
UROCOR, Inc.* 100 $ 738
Vencor, Inc. 100 950
Ventas, Inc.* 100 1,613
Warner-Lambert Company 900 57,431
Watson Pharmaceuticals, Inc.* 100 4,375
Wellpoint Health Networks, Inc.* 100 6,500
Zonagen, Inc.* 100 3,650
-----------
1,120,209
-----------
ELECTRONICS -- 3.3%
Acxiom Corporation* 100 2,162
Advanced Fibre Communication, Inc.* 100 3,706
Allen Telecom, Inc.* 100 1,200
Alliant Techsystems, Inc.* 100 6,450
AMP, Inc. 100 3,800
Andrew Corporation* 100 2,197
Applied Materials, Inc.* 500 16,000
Ascend Communications, Inc.* 200 8,638
Atmel Corporation* 100 1,481
AVX Corporation 100 1,887
Barnett, Inc.* 100 1,813
Bell Industries, Inc.* 100 1,262
Blonder Tongue Laboratories, Inc.* 100 963
Cadence Design Systems, Inc.* 100 3,525
CIENA Corporation* 200 10,400
Cypress Semiconductor Corporation* 100 856
Electro Scientific Industries, Inc.* 100 3,350
Electronic Data Systems Corporation 500 18,188
EMC Corporation* 500 20,719
Excel Communications, Inc.* 100 2,200
Excel Technology, Inc.* 100 1,012
General Instrument Corporation* 400 9,525
General Semiconductor, Inc.* 800 10,800
General Signal Corporation 200 8,225
GenRad, Inc.* 300 5,250
GeoTel Communications Corporation* 100 2,719
Glenayre Technologies, Inc.* 700 10,719
Hearst-Argyle Television, Inc.* 100 3,600
Hewlett-Packard Company 1,000 62,125
Intel Corporation 1,500 107,156
ITT Industries, Inc. 100 3,687
KLA-Tencor Corporation* 100 3,388
Level One Communications, Inc.* 200 5,338
Linear Technology Corporation 100 6,994
Loral Space & Communications Ltd.* 100 2,537
Lucent Technologies, Inc. 1,200 85,125
Metal Management, Inc.* 100 1,000
Methode Electronics, Inc. - Class A 300 3,825
37
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
ELECTRONICS -- continued
Micron Technology, Inc.* 400 $ 9,425
Motorola, Inc. 600 31,762
MRV Communications, Inc.* 300 6,975
Netscape Communications
Corporation* 100 2,450
NEXTEL Communications, Inc. -
Class A* 500 11,781
Omnipoint Corporation* 100 2,056
P-COM, Inc.* 100 1,500
QUALCOMM, Inc.* 100 5,213
Rambus, Inc.* 100 3,866
Rational Software Corporation* 100 1,525
SCI Systems, Inc.* 100 3,412
Scientific-Atlanta, Inc. 100 2,206
Sensormatic Electronics Corporation 100 1,281
Sequent Computer Systems, Inc.* 100 1,656
Snyder Communication, Inc.* 100 4,031
Solectron Corporation* 100 4,138
Speed Fam International, Inc.* 100 1,950
Symbol Technologies, Inc. 100 3,519
Tele-Communications International,
Inc.* 100 1,706
Tellabs, Inc.* 200 13,744
Teradyne, Inc. 100 3,075
Texas Instruments, Inc. 400 20,550
Thermo Electron Corporation* 100 3,513
ThermoQuest Corporation* 100 1,500
Thomas & Betts Corporation 100 5,344
Transaction Network Services, Inc.* 100 2,037
United States Satellite Broadcasting
Company, Inc.* 100 956
Vicor Corporation* 100 1,563
Vishay Intertechnology, Inc.* 105 2,343
Watkins-Johnson Company 100 2,519
Western Digital Corporation* 100 1,700
Western Wireless Corporation* 100 1,850
Xilinx, Inc.* 100 3,803
Zenith Electronics Corporation* 100 50
-----------
608,821
-----------
ENERGY AND UTILITIES -- 2.2%
AES Corporation* 200 9,512
AGL Resources, Inc. 100 2,000
Alleghny Energy, Inc. 100 2,806
Ameren Corporation 100 3,913
American Electric Power Company 200 9,075
American Water Works Company, Inc. 100 2,937
38
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
ENERGY AND UTILITIES-- continued
Atrion Gas and Electric Company 400 $ 4,000
Baltimore Gas and Electric Company 100 3,044
BEC Energy 100 4,056
CalEnergy Company, Inc.* 100 3,025
California Water Service Group 100 2,219
Carolina Power and Light Company 100 4,100
Central & South West Corporation 200 5,287
Cinergy Corporation 100 3,231
CMS Energy Corporation 100 4,356
Coastal Company 100 7,050
Columbia Energy Corporation 100 8,438
Conectiv, Inc. 75 1,533
Conectiv, Inc. - Class A 1 16
Consolidated Edison Company
of New York, Inc. 200 9,075
Consolidated Natural Gas Company 100 5,656
Dominion Resources, Inc. 200 7,938
DQE, Inc. 100 3,287
DTE Energy Company 100 3,956
Duke Energy Corporation 300 17,288
Edison International 400 11,800
El Paso Natural Gas Company 100 3,862
Energy East Corporation 100 4,062
Enova Corporation 100 2,556
Enron Corporation 300 15,038
First Energy Corporation 200 5,937
Florida Progress Corporation 100 4,125
FPL Group, Inc. 200 12,288
Global Industrial Technologies, Inc.* 100 1,694
GPU, Inc. 100 3,850
Houston Industries, Inc. 300 8,587
Illinova Corporation 100 2,906
Interstate Energy Corporation 100 3,006
IPALCO Enterprises, Inc. 100 4,213
Kansas City Power & Light Company 100 2,875
LG&E Energy Corporation 100 2,656
Long Island Lighting Company 100 2,981
MCN Energy Group, Inc. 100 3,600
MDU Resources Group, Inc. 200 6,663
Mid American Energy Holding Company 100 2,081
Middlesex Water Company 100 2,006
Montana Power Company 100 3,625
New Century Energies, Inc. 100 4,600
New England Electric System 100 4,175
Niagra Mohawk Power Corporation* 100 1,238
NICOR, Inc. 100 3,862
Nipsco Industries, Inc. 100 2,688
39
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
ENERGY AND UTILITIES -- continued
Northeast Utilities* 100 $ 1,594
Northern States Power Company 100 5,687
Northwestern Corporation 100 2,413
OGE Energy Corp. 200 10,725
Pacific Enterprises 100 3,806
PG&E Corporation 500 15,750
Pinnacle West Capital Corporation 100 4,494
Public Service Enterprises Group, Inc. 200 6,612
Puget Sound Energy, Inc. 100 2,613
SCANA Corporation 100 2,881
Seagull Energy Corporation* 100 1,656
Sierra Pacific Resources 100 3,431
Sonat, Inc. 100 3,919
Southern Company 700 18,594
TECO Energy, Inc. 100 2,619
Texas Utilities Company 200 7,900
Unicom Corporation 200 6,875
UtiliCorp United, Inc. 100 3,556
Washington Gas Light Company 100 2,606
Washington Water Power Company 100 2,156
Western Resources, Inc. 100 3,838
WICOR, Inc. 100 4,575
The Williams Companies, Inc. 400 12,975
Wisconsin Energy Corporation 100 2,950
WPS Resources Corporation 200 6,262
-----------
395,259
-----------
ENERGY - RAW MATERIALS -- 0.9%
AMCOL International Corporation 650 8,938
Anardarko Petroleum Corporation 100 6,600
Arabian Shield Development Company* 100 275
Aztec Manufacturing Company 100 1,337
Baker Hughes Incorporated 300 10,800
Burlington Resources, Inc. 200 8,425
Dawson Geophysical Company* 100 1,600
Denbury Resources, Inc.* 100 1,663
Dresser Industries, Inc. 200 9,312
EEX Corporation* 100 988
Halliburton Company 200 9,475
Harken Energy Corporation* 200 1,037
Helmerich & Payne, Inc. 100 2,525
KCS Energy, Inc. 100 1,188
Key Energy Group, Inc.* 100 1,644
Louis Dreyfus Natural Gas Corporation* 100 1,750
MAXXAM, Inc.* 100 5,894
McDermott International, Inc. 200 7,637
Nabors Industries, Inc.* 100 2,356
Newpark Resources, Inc.* 100 1,819
40
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
ENERGY - RAW MATERIALS-- continued
NGC Corporation 100 $ 1,519
Noble Affiliates, Inc. 100 3,906
Occidental Petroleum Corporation 500 13,813
Parker Drilling Company* 100 844
Petroleum Development Corporation* 100 550
Schlumberger Limited 500 39,031
Seitel, Inc.* 100 1,700
Smith International, Inc.* 100 4,906
Trico Marine Services, Inc.* 100 1,975
Union Texas Petroleum Holdings, Inc. 100 2,750
Valero Energy Corporation 100 3,262
Varco International, Inc.* 100 2,606
Western Atlas, Inc.* 100 8,656
XCL Ltd.* 100 400
-----------
171,181
-----------
FOOD AND AGRICULTURE -- 2.8%
Archer-Daniels-Midland Company 500 9,438
Bestfoods 300 16,931
Bob Evans Farms, Inc. 300 6,394
Campbell Soup Company 400 21,800
Chiquita Brands International, Inc. 100 1,344
The Coca-Cola Company 2,300 180,262
Coca Cola Enterprises, Inc. 400 15,025
ConAgra, Inc. 500 14,625
Dean Foods Company 100 4,925
Dole Food Company, Inc. 100 4,619
Flowers Industries, Inc. 300 6,188
General Mills, Inc. 100 6,825
H.J. Heinz Company 300 15,919
Hershey Foods Corporation 100 6,925
IBP, Inc. 100 1,937
International Home Foods, Inc.* 100 2,713
Interstate Bakeries Corporation 100 3,225
Keebler Foods Company* 100 2,906
Kellogg Company 400 16,525
Lance, Inc. 200 4,200
Lindsay Manufacturing Company 100 4,650
McCormick & Co., Inc. 200 6,700
Mississippi Chemical Corporation 100 1,675
Nash Finch Company 400 6,750
PepsiCo, Inc. 1,400 57,138
Pioneer Hi-Bred International, Inc. 200 7,612
The Quaker Oats Company 100 5,769
Ralston-Purina Group 100 11,131
Rexall Sundown, Inc.* 100 3,350
Sara Lee Corporation 400 23,550
Smithfield Foods, Inc.* 100 2,700
41
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
FOOD AND AGRICULTURE -- continued
Suiza Foods Corporation* 200 $ 11,687
SUPERVALU, Inc. 100 4,188
Terra Industries, Inc. 100 1,012
Whitman Corporation 100 2,169
Wild Oats Markets, Inc.* 100 2,875
Wm. Wrigley Jr. Company 100 9,625
-----------
505,307
-----------
GOLD -- .07%
Battle Mountain Gold Company 100 531
Homestake Mining Company 700 7,613
Newmont Gold Company 200 5,212
-----------
13,356
-----------
INSURANCE -- 2.5%
20th Century Industries 100 2,819
Acceptance Insurance Companies, Inc.* 200 4,600
AFLAC, Inc. 100 6,394
Allmerica Financial Corporation 100 6,269
Allstate Corporation 400 37,650
Ambac Financial Group, Inc. 100 5,469
American Bankers Insurance Group, Inc. 100 6,000
American General Corporation 300 20,137
American International Group, Inc. 700 86,669
Amerin Corporation* 300 9,019
Aon Corporation 200 12,812
Argonaut Group, Inc. 100 3,213
Chubb Corporation 200 15,912
Cigna Corporation 200 13,700
Cincinnati Financial Corporation 300 12,600
CNA Financial Corporation 100 15,125
Conseco, Inc. 200 9,325
Erie Indemnity Company 200 5,700
The Equitable Companies, Inc. 200 13,775
FBL Financial Group, Inc. 100 2,806
General Re Corporation 100 21,988
The Hartford Financial Services Group 100 11,006
Jefferson-Pilot Corporation 150 8,587
Life Re Corporation 200 14,725
Marsh and McLennan Companies, Inc. 200 17,513
MBIA, Inc. 100 7,456
MGIC Investment Corporation 100 5,994
The PMI Group, Inc. 100 7,519
The Progressive Corporation 100 13,787
Protective Life Corporation 200 7,200
Reliance Group Holdings, Inc. 100 1,806
Risk Capital Holdings, Inc.* 100 2,488
RLI Corp. 200 10,425
SCPIE Holdings, Inc. 100 3,625
42
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- CONTINUED
INSURANCE -- continued
Selective Insurance Group, Inc. 200 $ 5,275
The St. Paul Companies, Inc. 200 8,875
Transamerica Corporation 100 11,500
Travelers Property Casualty
Corporation 100 4,156
United Companies Financial
Corporation 100 1,837
-----------
455,756
-----------
INTERNATIONAL OIL -- 1.8%
Amoco Corporation 900 37,631
Aviva Petroleum, Inc.* 600 563
Chevron Corporation 600 47,925
Exxon Corporation 2,300 162,150
Mobil Corporation 700 54,600
Texaco, Inc. 500 28,875
-----------
331,744
-----------
LIQUOR -- 0.2%
Anheuser-Busch Companies, Inc. 400 18,375
Brown Forman Corporation - Class B 100 5,763
Robert Mondavi Corporation* 100 3,562
-----------
27,700
-----------
MEDIA -- 1.6%
The Ackerley Group, Inc. 100 2,000
A.H. Belo Corporation 100 5,150
AMC Entertainment, Inc.* 400 7,200
ANTEC Corporation* 100 1,916
BI, Inc.* 100 962
CBS Corporation* 700 22,225
Century Communications Corporation* 100 1,594
Chancellor Media Corporation* 100 4,181
Clear Channel Communications, Inc.* 100 9,588
Comcast Corporation 300 10,284
Cox Communications, Inc.* 200 8,738
Cymer, Inc.* 100 1,903
Dow Jones & Company, Inc. 100 4,812
E.W. Scripps Company 100 5,288
Gannett Company, Inc. 300 19,781
Gartner Group, Inc.* 100 3,306
Gaylord Entertainment Company 100 3,369
Harte-Hanks Communications, Inc. 100 2,263
Hollinger International, Inc. 100 1,606
John Wiley & Sons, Inc. - Class A 100 5,400
Jones Intercable, Inc.* 100 2,150
King World Productions, Inc.* 100 2,550
Knight-Ridder, Inc. 100 5,706
Maxwell Technologies, Inc.* 100 2,688
43
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
INSURANCE -- continued
McClatchy Company 100 $ 2,969
McGraw-Hill Companies, Inc. 100 7,819
Meredith Corporation 100 3,975
Merrimac Industries, Inc. 110 1,609
Metro-Goldwyn-Mayer, Inc.* 100 2,444
Metromedia International Group, Inc.* 100 1,350
New York Times Company 100 7,050
NewsEDGE Corporation* 100 1,150
Outdoor Systems, Inc.* 100 3,000
Plenum Publishing Corporation 100 6,750
PRIMEDIA, Inc.* 100 1,331
R.R. Donnelley & Sons Company 100 4,500
Reader's Digest Association, Inc. 100 2,850
Spelling Entertainment Group, Inc.* 100 938
Tele-Communications TCI Ventures
Group* 400 6,963
Tele-Communications, Inc.* 500 17,156
Thomas Nelson, Inc. 100 1,294
TimeWarner, Inc. 500 38,906
Times Mirror Company 100 6,400
Tres Com International, Inc.* 100 1,062
Tribune Company 100 6,688
USA Networks, Inc.* 100 2,450
Viacom, Inc. - Class B* 300 16,500
Westwood One, Inc.* 100 2,675
-----------
282,489
-----------
MISCELLANEOUS FINANCE -- 4.2%
A.G. Edwards, Inc. 100 4,044
Affiliated Managers Group, Inc.* 100 3,581
Allied Capital Corporation 100 2,425
AMB Property Corporation 100 2,381
American Express Company 400 41,050
Arden Realty, Inc. 100 2,744
Area Bancshares Corporation 300 10,650
Associated Estates Realty Corporation 300 5,700
Associates First Capital Corporation 362 27,089
The Bear Stearns Companies, Inc. 100 5,425
Beneficial Corporation 100 13,400
Berkshire Hathaway, Inc.* 1 70,700
Capital Factors Holdings, Inc.* 400 7,375
Capital One Financial Corporation 100 9,981
CarrAmerica Realty Corporation 100 2,800
The Charles Schwab Corporation 400 13,200
Charter One Financial, Inc. 200 6,850
The CIT Group, Inc. 100 3,150
Commercial Net Lease Realty 300 4,819
Conning Corporation 100 2,050
44
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
MISCELLANEOUS FINANCE-- continued
Countrywide Credit Industries, Inc. 100 $ 4,625
CPB, Inc. 400 7,600
Crescent Real Estate Equities Company 100 3,425
Dain Rauscher Corporation 100 5,675
Dime Bancorp, Inc. 100 2,919
Equity Office Properties Trust 200 5,500
Everest Reinsurance Holdings, Inc. 200 7,775
Fannie Mae 1,000 59,875
First Washington Realty Trust, Inc. 400 10,075
FIRSTPLUS Financial Group, Inc.* 200 7,975
Franklin Resources, Inc. 300 14,662
Freddie Mac 700 31,850
Golden State Bancorp, Inc.* 100 3,831
Green Tree Financial Corporation 300 12,056
H.F. Ahmanson & Company 100 7,625
Health and Retirement Property Trust 200 3,700
Household International, Inc. 100 13,531
Indymac Mortgage Holdings, Inc. 100 2,369
IRT Property Company 100 1,137
Lehman Brothers Holding, Inc. 100 7,094
Leucadia National Corporation 100 3,431
Liberty Property Trust 100 2,644
M.D.C. Holdings, Inc. 100 1,513
Mack-Cali Realty Corporation 100 3,600
MBNA Corporation 500 15,844
Mechanics Savings Bank* 400 11,950
Meditrust Companies 100 2,819
Merrill Lynch & Co., Inc. 300 26,850
The Money Store, Inc. 100 3,300
Morgan Stanley, Dean Witter, Discover
and Co. 600 46,837
New Plan Realty Trust 100 2,344
Northwest Savings Bank 300 4,875
Ocwen Asset Investment Corporation 100 1,700
Ocwen Financial Corporation* 100 2,438
Pacific America Money Center, Inc.* 100 2,100
Paine Webber Group, Inc. 100 4,294
Patriot American Hospitality, Inc. 200 4,787
Pennsylvania Real Estate Investment
Trust 100 2,356
Prime Retail, Inc. 500 6,594
Providian Financial Corporation 100 6,363
Public Storage, Inc. 100 3,000
R&G Financial Corporation 100 3,925
Security Capital Industrial Trust 100 2,462
Security Capital Pacific Trust 100 2,256
SLM Holding Corporation 250 9,984
Sovereign Bancorp, Inc. 260 4,599
45
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
MISCELLANEOUS FINANCE -- continued
Storage Trust Realty 100 $ 2,413
T. Rowe Price Associates, Inc. 200 7,087
TCF Financial Corporation 100 3,256
Travelers Group, Inc. 1,039 63,379
United Asset Management
Corporation 200 5,200
United Dominion Realty Trust, Inc. 100 1,413
Vision Twenty-One, Inc.* 600 4,387
Washington Mutual, Inc. 300 21,188
Westfield America, Inc. 100 1,750
White River Corporation* 100 8,925
-----------
754,576
-----------
MOTOR VEHICLES -- 1.2%
Aftermarket Technology Corporation* 100 1,712
Automobile Protection Corporation* 100 1,225
Cascade Corporation 500 8,562
Chrysler Corporation 500 27,813
Eaton Corporation 100 8,981
Echlin, Inc. 200 9,500
Excelsior-Henderson Motorcycle
Manufacturing Co.* 100 631
Ford Motor Company 1,100 57,062
General Motors Corporation 700 50,356
Hayes Lemmerz International, Inc.* 100 3,918
Lear Corporation* 100 5,338
Meritor Automotive, Inc. 100 2,406
Myers Industries, Inc. 100 2,112
Navistar International Corporation* 200 6,037
Penske Motorsports, Inc.* 100 3,225
Safety Components International, Inc.* 100 1,700
Sonic Automotive, Inc.* 100 1,788
Stoneridge, Inc.* 100 2,225
Superior Industries International, Inc. 100 2,912
Titan International, Inc. 100 1,944
U.S. Rentals, Inc.* 200 6,487
United Auto Group, Inc.* 100 2,050
Wynn's International, Inc. 100 2,100
-----------
210,084
-----------
NON-DURABLES AND ENTERTAINMENT-- 0.9%
A.T. Cross Company 100 1,156
American Greetings Corporation 100 4,750
AMF Bowling, Inc.* 100 2,500
Applebee's International, Inc. 100 2,437
Applied Science and Technology, Inc.* 100 925
At Entertainment, Inc.* 100 1,700
Boston Chicken, Inc.* 100 203
46
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- continued
NON-DURABLES AND ENTERTAINMENT -- continued
Boyd Gaming Corporation* 100 $ 669
Brinker International, Inc.* 100 2,175
Cheesecake Factory, Inc.* 150 3,028
CKE Restaurants, Inc. 100 3,175
Concepts Direct, Inc.* 100 1,475
Consolidated Products, Inc.* 100 1,981
Cracker Barrel Old Country Store, Inc. 100 3,225
Cytyc Corporation* 100 1,675
Darden Restaurants, Inc. 100 1,544
Electronic Arts, Inc.* 100 4,350
Foodmaker, Inc.* 100 1,688
Fortune Brands, Inc. 200 7,687
Frisch's Restaurants, Inc. 100 1,194
Harcourt General, Inc. 100 5,450
Hasbro, Inc. 100 3,825
II Fornaio (America) Corporation* 100 1,312
International Game Technology 100 2,469
Landry's Seafood Restaurant's, Inc.* 100 2,266
Mattel, Inc. 300 11,362
McDonald's Corporation 600 39,375
The Ohio Art Company 100 2,550
On Command Corporation* 400 5,500
Orphan Medical, Inc.* 100 1,087
Papa John's International, Inc.* 100 4,163
Pizza Inn, Inc. 100 569
Planet Hollywood International, Inc.* 100 856
Premark International, Inc. 100 3,206
Rainforest Cafe, Inc.* 100 1,391
Rubbermaid, Inc. 100 3,262
Ryan's Family Steak Houses, Inc.* 100 1,019
Service Corporation International 200 8,175
Sotheby's Holding, Inc. 100 2,300
Starbucks Corporation* 100 4,800
Taco Cabana, Inc.* 100 637
Triarc Companies* 100 2,438
Tricon Global Restaurants, Inc.* 140 4,349
Tupperware Corporation 100 2,700
Wendy's International, Inc. 100 2,469
-----------
165,067
-----------
NON-FERROUS METALS -- 0.2%
AFC Cable Systems, Inc.* 100 3,375
Aluminum Company of America 200 13,874
Cyprus Amax Minerals Company 400 6,350
Howmet International, Inc.* 100 1,512
Kaiser Aluminum Corporation* 100 1,038
47
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
NON-FERROUS METALS -- continued
Minerals Technologies, Inc. 100 $ 5,294
Titanium Metals Corporation 100 2,431
-----------
33,874
-----------
OPTICAL AND PHOTO -- 0.2%
Corning, Inc. 100 3,944
CPI Corporation 100 2,563
DENTSPLY International, Inc. 100 3,374
Eastman Kodak Company 300 21,413
Meade Instruments Corporation* 100 1,037
Perceptron, Inc.* 400 4,900
Photronics, Inc.* 100 2,638
Todd-AO Corporation 100 1,250
-----------
41,119
-----------
PAPER AND FOREST PRODUCTS -- 0.6%
Boise Cascade Corporation 100 3,338
Bowater Incorporated 200 10,125
Buckeye Technologies, Inc.* 100 2,256
Caraustar Industries, Inc. 100 3,069
Chesapeake Corporation 100 3,550
Georgia-Pacific Group 100 6,419
Georgia-Pacific Timber Group 100 2,355
International Paper Company 300 13,800
Jefferson Smurfit Corporation* 400 7,375
Kimberly-Clark Corporation 500 24,781
Long View Fibre Company 100 1,650
Louisiana-Pacific Corporation 100 1,994
P.H. Glatfelter Company 100 1,631
Thermo Fibertek, Inc.* 100 1,150
Union Camp Corporation 100 5,469
Wausau-Mosimee Paper Corporation 100 2,138
Westvaco Corporation 100 2,850
Weyerhaeuser Company 300 15,244
-----------
109,194
-----------
PRODUCER GOODS -- 2.9%
AGCO Corporation 100 2,512
Albany International Corp. 200 5,800
AlliedSignal, Inc. 500 21,375
American Standard Companies, Inc.* 100 4,825
Avery Dennison Corporation 100 5,181
Blount International, Inc. 100 2,819
Boise Cascade Office Products
Corporation* 100 1,712
Case Corporation 100 5,788
Caterpillar, Inc. 400 21,975
Cooper Industries, Inc. 100 6,432
48
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- continued
PRODUCER GOODS -- continued
Corporate Express, Inc.* 300 $ 3,478
Daisytek International Corporation* 100 2,550
Deere and Company 200 10,375
Dover Corporation 200 7,500
Emerson Electric Company 400 24,300
General Electric Company 3,100 258,462
Graco, Inc. 100 3,462
Harnischfeger Industries, Inc. 100 3,150
Harsco Corporation 100 4,363
Haskel International, Inc. 100 1,050
Helix Technology Corporation 100 1,781
Herman Miller, Inc. 100 2,769
HON Industries, Inc.* 100 3,200
Hubbell, Inc. - Class B 100 4,706
Illinois Tool Works, Inc. 200 13,200
Ingersoll-Rand Company 200 9,012
Jabil Circuit, Inc.* 200 6,813
Johnson Controls, Inc. 100 5,950
Kuhlman Corporation 100 4,225
Marine Drilling Companies, Inc.* 100 1,881
Mark IV Industries, Inc. 100 2,200
Oceaneering International, Inc.* 100 2,150
Pall Corporation 100 1,981
Pameco Corporation* 100 1,838
Parker-Hannifin Corporation 100 4,107
Raychem Corporation 100 3,763
Snap-on, Inc. 100 4,388
Tecumseh Products Company 100 4,988
Tenneco, Inc. 200 8,325
Thermo Instrument Systems, Inc.* 100 2,806
Thermo Optek Corporation* 100 1,575
Timken Company 100 3,763
Tokheim Corporation 600 9,563
Trinity Industries, Inc. 100 4,775
U.S. Industries, Inc. 200 5,275
UCAR International, Inc.* 200 6,400
US Filter Corporation* 100 3,044
Valhi Corporation* 100 981
Woodward Governor Company 200 5,800
York International Corporation 100 5,000
-----------
533,368
-----------
RAILROAD AND SHIPPING -- 0.3%
Avondale Industries, Inc.* 100 2,813
Burlington Northern Santa Fe 100 9,950
CSX Corporation 200 9,525
Emergent Group, Inc.* 100 500
Kansas City Southern Industries, Inc. 100 4,238
49
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- continued
Railroad and Shipping -- continued
Norfolk Southern Corporation 300 $ 9,394
OMI Corporation* 100 919
Overseas Shipholding Group, Inc. 100 1,937
Spinnaker Industries, Inc.* 100 1,900
Union Pacific Corporation 200 9,675
Westinghouse Air Brake Company 100 2,762
-----------
53,613
-----------
REAL PROPERTY -- 0.2%
American Retirement Corporation* 100 1,950
Boston Properties, Inc. 100 3,400
Burnham Pacific Properties, Inc. 100 1,406
Catellus Development Corporation* 100 1,856
Cornerstone Properties, Inc. 100 1,750
Duke Realty Investments, Inc. 100 2,262
Hollywood Park, Inc.* 100 1,294
Kennedy-Wilson, Inc.* 100 950
The Rouse Company 100 3,006
Simon DeBartolo Group, Inc. 300 10,013
Starwood Hotels and Resorts 191 9,013
Vornado Realty Trust 144 5,519
-----------
42,419
-----------
RETAIL -- 3.2%
Albertson's, Inc. 200 9,262
American Stores Company 300 7,481
Authentic Fitness Corporation 100 1,819
Autozone, Inc.* 100 3,325
Barnes & Noble, Inc.* 100 3,388
Bed Bath & Beyond, Inc.* 100 5,019
Borders Group, Inc.* 200 6,200
Casey's General Stores, Inc. 100 1,419
Cendant Corporation* 740 16,049
Circuit City Stores - Circuit City
Group 100 4,237
Claire's Stores, Inc. 100 1,881
CompUSA, Inc.* 100 1,575
Consolidated Stores Corporation* 182 6,950
Costco Companies, Inc.* 200 11,575
CVS Corporation 132 9,252
Dayton Hudson Corporation 400 18,550
dELiA*s, Inc.* 100 2,350
Dollar General Corporation 125 4,766
Family Dollar Stores, Inc. 400 6,625
Federated Department Stores, Inc.* 200 10,362
Fred Meyer, Inc.* 100 4,300
The Gap, Inc. 400 21,600
General Nutrition Companies, Inc.* 100 3,156
50
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (continued) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS-- continued
RETAIL-- continued
Giant Food, Inc. 200 $ 8,600
The Great Atlantic & Pacific Tea
Company 100 3,200
Heilig-Meyers Company 500 6,000
The Home Depot, Inc. 700 54,994
Intimate Brands, Inc. 200 5,737
J.C. Penney Company, Inc. 200 14,363
Kohl's Corporation* 200 9,512
Kroger Company* 200 8,587
The Limited, Inc. 300 9,975
Lowe's Companies, Inc. 200 15,838
The May Department Stores Company 200 12,862
Nordstrom, Inc. 100 7,206
Office Depot, Inc.* 200 5,900
OfficeMax, Inc.* 100 1,644
Pep Boys - Manny, Moe & Jack 100 2,225
PETsMART, Inc.* 100 987
Pier 1 Imports, Inc. 100 2,406
Proffitt's, Inc.* 100 3,925
Rite Aid Corporation 200 7,163
Ross Stores, Inc. 200 8,825
Safeway, Inc. * 500 18,219
Saks Holding, Inc.* 100 2,356
Sears, Roebuck and Co. 400 24,725
Shopko Stores, Inc.* 300 10,463
Spiegel, Inc.* 100 531
Stage Stores, Inc.* 100 4,663
Staples, Inc.* 200 5,025
Tandy Corporation 100 4,425
TJX Companies, Inc. 200 9,350
Toys "R" Us, Inc.* 300 7,950
U.S. Office Products Company* 100 1,694
Walgreen Company 500 17,594
Wal-Mart Stores, Inc. 2,100 115,894
West Marine, Inc.* 100 1,919
Winn-Dixie Stores, Inc. 100 4,069
-----------
579,967
-----------
STEEL -- 0.2%
AK Steel Holding Corporation 100 1,862
Allegheny Teledyne, Inc.* 200 4,650
Armco, Inc.* 100 544
Bethlehem Steel Corporation* 100 1,225
Citation Corporation* 100 1,912
LTV Corporation 100 1,094
National Steel Corporation - Class B 500 7,875
Nucor Corporation 100 5,150
Roanoke Electric Steel Corporation 100 2,050
51
<PAGE>
Market
Shares Value
- ------------------------------------------------------------
STEEL -- continued
Steel Dynamics, Inc.* 100 $ 1,938
Worthington Industries, Inc. 100 1,763
-----------
30,063
-----------
TELEPHONE -- 3.6%
AirTouch Communications, Inc.* 500 23,812
ALLTEL Corporation 200 7,888
Ameritech Corporation 1,000 42,437
AT&T Corporation 1,500 91,313
Bell Atlantic Corporation 800 73,300
BellSouth Corporation 900 58,050
Century Telephone Enterprises, Inc. 150 6,647
Cincinnati Bell, Inc. 100 3,181
DSC Communications Corporation* 100 1,709
Emmis Broadcasting Corporation* 100 4,419
GTE Corporation 900 52,481
ICG Communications, Inc.* 31 950
Intermedia Communications, Inc.* 100 7,412
Jacor Communications, Inc. * 200 10,575
LCI International, Inc.* 200 7,488
Level 3 Communications, Inc.* 200 10,012
MCI Communications Corporation 600 32,081
McLeod USA Incorporated - Class A* 200 8,300
NEXTLINK Communications, Inc.* 400 12,475
Optical Cable Corporation* 100 950
Paging Network, Inc.* 100 1,369
PairGain Technologies, Inc.* 200 3,125
RCN Corporation* 100 2,150
SBC Communications, Inc. 1,700 66,087
Skytel Communications, Inc.* 100 2,263
Southern New England
Telecommunications Corp. 100 6,437
Sprint Corporation 400 28,700
TCI Satellite Entertainment, Inc.* 100 563
Telephone and Data Systems, Inc. 100 4,375
Teleport Communications Group, Inc.* 100 5,594
Tel-Save Holdings, Inc.* 100 1,975
US West Communications Group 400 20,300
US West Media Group* 400 14,825
World Access, Inc.* 100 3,138
WorldCom, Inc.* 1,010 45,955
-----------
662,336
-----------
TIRES AND RUBBER -- 0.1%
Cooper Tire and Rubber Company 200 4,738
The Goodyear Tire & Rubber Company 200 14,375
TBC Corporation* 100 806
-----------
19,919
-----------
52
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Net Assets (concluded) May 31, 1998
Market
Shares Value
- ------------------------------------------------------------
COMMON STOCKS -- concluded
TOBACCO -- 0.6%
General Cigar Holdings, Inc.* 200 $ 1,987
Loews Corporation 200 18,150
Philip Morris Companies, Inc. 2,300 85,963
RJR Nabisco Holdings Corporation 100 2,819
UST, Inc. 100 2,662
-----------
111,581
-----------
TRAVEL AND RECREATION -- 0.9%
AMERCO* 200 6,500
American Skiing Company* 100 1,343
Avis Rent A Car, Inc.* 100 2,425
Bristol Hotel Company* 100 2,650
Brunswick Corporation 100 3,144
Callaway Golf Company 100 2,062
Candlewood Hotel Company, Inc.* 100 825
CapStar Hotel Company* 100 2,925
Carnival Corporation 300 20,325
Circus Circus Enterprises* 100 1,775
Extended Stay America, Inc.* 100 1,100
Fountain Powerboat Industries, Inc.* 100 1,025
Harrah's Entertainment, Inc.* 300 7,500
Hilton Hotels Corporation 100 3,144
La Quinta Inns, Inc. 100 2,156
Marriott International, Inc. 100 3,475
MGM Grand, Inc.* 100 3,319
MTR Gaming Group, Inc.* 100 275
National Golf Properties, Inc. 100 3,006
Powerhouse Technologies* 500 4,812
Promus Hotel Corporation* 100 4,325
Royal Carribean Cruise Lines Ltd. 100 6,969
Shuffle Master, Inc.* 100 925
Sodexho Marriot Services, Inc. 25 712
The Walt Disney Company 600 67,875
-----------
154,592
-----------
TRUCKING AND FREIGHT -- 0.1%
Alphanet Solutions, Inc.* 100 1,200
C.H. Robinson Worldwide, Inc. 100 2,312
Covenant Transport, Inc.* 100 1,638
Expeditors International of
Washington, Inc. 100 4,000
Heartland Express, Inc.* 400 8,750
Matlack Systems, Inc.* 100 850
P.A.M. Transportation Services* 100 1,025
Rollins Truck Leasing Corporation 150 1,800
53
<PAGE>
Shares/
Principal Market
Value (000) Value
- ------------------------------------------------------------
TRUCKING AND FREIGHT -- continued
Shurgard Storage Centers, Inc. 100 $ 2,869
-----------
24,444
-----------
Total Common Stocks
(Cost $9,957,423) 10,693,312
-----------
PREFERRED STOCK -- .0002%
Containers -- .0002%
Sealed Air Corporation 1 $ 28
-----------
Total Preferred Stocks
(Cost $20) 28
-----------
U.S. TREASURY BONDS -- 34.0%
10.375%, 11/15/12 $2,000 2,663,493
7.875%, 2/15/21 2,850 3,542,837
-----------
Total U.S. Treasury Bonds
(Cost $6,058,276) 6,206,330
-----------
REPURCHASE AGREEMENT -- 6.3%
Goldman Sachs & Co., 5.40%
Dated 5/29/98, to be repurchased
on 6/1/98, collateralized by
U.S. Treasury Bonds with a market
value of $1,165,427.
(Cost $1,142,000) 1,142 $ 1,142,000
-----------
Total Investment in Securities -- 99.0%
(Cost $17,157,193)** 18,041,670
-----------
Other Assets in Excess of
Liabilities, Net-- 1.0% 178,069
-----------
Net Assets-- 100.0% $18,219,739
===========
Net Asset Value and Redemption
Price Per Share
($18,219,739 / 1,656,815 shares outstanding) $11.00
======
Maximum Offering Price Per Share
($11.00 / 0.955 ) $11.51
======
- ------------------------------------------------------------
* Non-income producing security.
** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
54
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
For the Period
September 16, 1997(1)
through
May 31, 1998
- -----------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest $ 175,650
Dividends 73,403
----------
Total income 249,053
----------
EXPENSES:
Investment advisory fee 32,924
Distribution fee 20,577
Transfer agent fee 5,827
Accounting fee 10,103
Printing and postage 26,470
Custodian fee 8,824
Audit fee 20,480
Registration fees 15,102
Administration fee 9,877
Legal fees 26,791
Miscellaneous 8,184
----------
Total expenses 185,159
Less: Fees waived and expenses reimbursed (102,849)
----------
Net expenses 82,310
----------
Net investment income 166,743
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions 198,062
Change in unrealized appreciation/depreciation of investments 884,277
----------
Net gain on investments 1,082,339
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $1,249,082
==========
- -----------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
See Notes to Financial Statements.
55
<PAGE>
ISI STRATEGY FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
September 16, 1997(1)
through
May 31, 1998
- -----------------------------------------------------------------------------------
<S><C>
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 166,743
Net realized gain from security transactions 198,062
Change in unrealized appreciation/depreciation of investments 884,277
-----------
Net increase in net assets resulting from operations 1,249,082
-----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income:
ISI Class (105,433)
-----------
CAPITAL SHARE TRANSACTIONS (NOTE B):
Proceeds from sale of shares 18,021,106
Value of shares issued in reinvestment of dividends 99,815
Cost of shares repurchased (1,044,831)
-----------
Increase in net assets derived from capital share transactions 17,076,090
-----------
Total increase in net assets 18,219,739
NET ASSETS:
Beginning of period --
-----------
End of period $18,219,739
===========
- -----------------------------------------------------------------------------------
</TABLE>
(1) Commencement of operations.
See Notes to Financial Statements.
56
<PAGE>
ISI STRATEGY FUND, INC.
Financial Highlights (For a share outstanding throughout the period)
For the Period
September 16, 1997(1)
through
May 31, 1998
- --------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value at beginning of period $ 10.00
-------
Income from Investment Operations:
Net investment income 0.13
Net realized and unrealized gain on investments 0.96
-------
Total from Investment Operations 1.09
-------
Less Distributions:
Distributions from net investment income (0.09)
-------
Total distributions (0.09)
-------
Net asset value at end of period $ 11.00
=======
Total Return 10.94%
Ratios to Average Daily Net Assets:
Expenses 1.00%*(2)
Net investment income 2.03%*(3)
Supplemental Data:
Net assets at end of period (000) $18,220
Portfolio turnover rate 20.08%
- --------------------------------------------------------------------------
* Annualized.
(1) Commencement of operations.
(2) Ratio of expenses to average net assets prior to expense waiver was 2.25%.
(3) Ratio of net investment income to average net assets prior to expense waiver
was .775%.
See Notes to Financial Statements.
57
<PAGE>
NOTES TO FINANCIAL STATEMENTS
A. Significant Accounting Policies -- ISI Strategy Fund, Inc. (the "Fund"),
which was organized as a Maryland Corporation on June 12, 1997 and commenced
operations September 16, 1997, is registered under the Investment Company Act
of 1940 as a diversified, open-end investment management company. It seeks to
maximize total return through a combination of long-term growth of capital
and current income by actively apportioning the Funds' assets between
diversified investments in U.S. equity securities and U.S. Treasury
Securities.
The Fund consists of one share class, ISI Shares, which has a 4.45% maximum
sales charge and a .25% distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the
date of the financial statements; 2) the contingent assets and liabilities
that we disclose at the date of the financial statements, and 3) the
revenues and expenses that we report for the period. Our estimates could be
different from the actual results. The Fund's significant accounting
policies are:
Security Valuation -- The Fund values a portfolio security that is primarily
traded on a national exchange by using the last sales price reported for the
day. If there are no sales or the security is not traded on a listed
exchange, the Fund values the security at the average of the last bid and
asked prices in the over-the-counter market. When a market quotation is not
readily available, the Investment Advisor under the direction of the Board
of Directors determines a fair value using the policies and procedures that
the Board of Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost.
Repurchase Agreements -- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase agreement is
a short-term investment in which the Fund buys a debt security that the
broker agrees to repurchase at a set time and price. The third party, which
is the broker's custodial bank, holds the collateral in a separate account
until the repurchase agreement matures. The agreement ensures that the
collateral's market value, including any accrued interest, is sufficient if
the broker defaults. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines or
if the broker enters into an insolvency proceeding.
Federal Income Taxes -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and gains
that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially all
of its taxable net investment income and net realized capital gains, it will
be exempt from most, if not all, federal income and excise tax.
As a result, the Fund has made no provisions for federal income taxes.
Security Transactions, Investment Income, Distributions and Other -- The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. Interest
income is recorded on an accrual basis and includes the pro rata scientific
method for amortization of premiums and accretion of discounts when
appropriate.
58
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Expenses are recorded as incurred. Dividend income and distributions to
shareholders are recorded on the exdividend date. The Fund has deferred the
costs incurred by its organization and the initial public offering of
shares. These costs are being amortized on the straight-line method over a
five-year period, except for registration fee's which are amortized over a
three-year period, which began when the Fund commenced investment
activities.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees --
International Strategy & Investment Inc. ("ISI") is the Fund's investment
advisor, Wilshire Associates Incorporated ("Wilshire") is the Funds
subadvisor and Investment Company Capital Corp. ("ICC"), a subsidiary of
Bankers Trust Corporation, is the Fund's administrator.
As compensation for advisory services, the Fund pays ISI an annual fee based
on the Fund's average daily net assets. This fee is calculated daily and
paid monthly at the annual rate of 0.40%. As compensation for subadvisory
services, ISI pays Wilshire an annual fee based on the Fund's average daily
net assets. This fee is calculated daily and paid monthly at the annual rate
of 0.16%. ISI and Wilshire have agreed to waive their annual fees and
reimburse expenses proportionately when necessary, so that the Fund's total
operating expenses are no more than 1.00% of its average daily net assets.
As compensation for administrative services, the Fund pays ICC an annual fee
based on the Fund's average daily net assets. This fee is calculated daily
and paid monthly at the annual rate of 0.12%. ICC has agreed to waive its
fee until the Fund has $50 million in net assets or has been in operation
for one year, whichever occurs first.
Certain officers and directors of the Fund are also officers or directors of
the Fund's investment advisor, subadvisor or administrator.
As compensation for its accounting services, the Fund pays ICC an annual fee
based on the Fund's average daily net assets.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's
custodian.
As compensation for providing distribution services, the Fund pays ISI Group
Inc., which is affiliated with ISI, an annual fee that is calculated daily
and paid monthly. This fee is paid at an annual rate equal to 0.25% of the
Fund's average daily net assets.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the period
ended May 31, 1998 was $748, and the accrued liability was $739.
As compensation for brokerage services, BTAlex. Brown brokers received
$22,646 for the period ended May 31, 1998.
59
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
C. Capital Share Transactions -- The Fund is authorized to issue up to 25
million shares of $.001 par value capital stock (20 million ISI Class, 5
million Wilshire Institutional Class). Transactions in shares of the Fund
were as follows:
For the Period
Sept. 16, 1997(1)
through
May 31, 1998
-----------------
Shares sold 1,744,374
Shares issued to shareholders on
reinvestment of dividends 9,391
Shares redeemed (96,939)
-----------
Net increase in shares outstanding 1,656,826
===========
Proceeds from sales of shares $18,021,106
Value of reinvested dividends 99,815
Cost of shares redeemed (1,044,831)
-----------
Net increase for capital share
transactions $17,076,090
===========
----------
(1) Commencement of operations.
D. Investment Transactions -- Excluding short-term and U.S. government
obligations, purchases of investment securities aggregated $11,788,014 and
sales of investment securities aggregated $2,028,633 for the period ended
May 31, 1998. Purchases of U.S. government obligations aggregated
$6,085,021. There were no sales of U.S. government obligations for the
period.
On May 31, 1998, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $1,270,737 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $386,460.
E. Net Assets -- On May 31, 1998, net assets consisted of:
Paid-in capital $17,076,090
Accumulated net realized gain
from security transactions 198,062
Unrealized appreciation of
investments 884,277
Undistributed net investment
income 61,310
-----------
$18,219,739
===========
F. Federal Tax Information (unaudited) 68% of the net investment income
dividends paid by the Fund during the tax period ended May 31, 1998,
qualified for the Dividends Received Deduction.
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by an effective prospectus.
For more complete information regarding any of the ISI Funds, including
charges and expenses, obtain a prospectus from your investment representative or
directly from the Fund at 1-800-955-7175. Read it carefully before you invest.
- --------------------------------------------------------------------------------
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ISI Strategy Fund, Inc.
We have audited the statement of net assets of the ISIStrategy Fund, Inc. as of
May 31, 1998, and the related statements of operations, changes in net assets,
and the financial highlights for the period September 16, 1997 (commencement of
operations) through May 31, 1998. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at May 31, 1998 by
correspondence with the custodian and broker. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of ISIStrategy Fund,
Inc. as of May 31, 1998, the results of its operations, the changes in its net
assets and the financial highlights for the stated period referred to above in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
June 26, 1998
61
