<PAGE>
As Filed With the Securities and Exchange Commission on July 31, 1998
Registration No. 333-31127
811-8291
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 2 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 3 [X]
ISI STRATEGY FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
717 Fifth Avenue
New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 446-5600
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R. Alan Medaugh
717 Fifth Avenue
New York, NY 10022
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(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esq.
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
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It is proposed that this filing will become effective (check appropriate box)
_____ immediately upon filing pursuant to paragraph (b)
_____ on ____, 1998 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
__X__ on October 1, 1998 pursuant to paragraph (a) of Rule 485
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<PAGE>
ISI
INTERNATIONAL STRATEGY & INVESTMENT INC.
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 apportioned between U.S. equity
securities 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................................................... 1
FEES AND EXPENSES OF THE FUND........................................ 2
INVESTMENT PROGRAM................................................... 3
THE FUND'S NET ASSET VALUE........................................... 4
HOW TO BUY SHARES.................................................... 5
HOW TO REDEEM SHARES................................................. 6
TELEPHONE TRANSACTIONS............................................... 7
SALES CHARGES........................................................ 7
DIVIDENDS AND TAXES.................................................. 10
INVESTMENT ADVISOR AND SUB-ADVISOR................................... 10
ADMINISTRATOR........................................................ 12
FINANCIAL HIGHLIGHTS................................................. 13
APPLICATION.......................................................... 14
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.
<PAGE>
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 apportioned between U.S. equity 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 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") is responsible for selecting the Fund's equity investments
using a stratified sampling technique that seeks to capture the return of the
broad U.S. equity market (refer to the sections on Investment Advisor and
Sub-Advisor).
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 particularly volatile, while the prices of Treasury
securities will respond to economic and market factors, especially interest
rate changes. Whether 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.
Fund Performance
This table shows the Fund's total return compared to that of the
Wilshire 5000 Index and the Consumer Price Index for the period from the
Fund's inception on September 16, 1997 through December 31, 1997. This
information provides some indication of the risks of investing in the Fund.
This is an historical record and does not necessarily indicate how the Fund
will perform in the future.
1
<PAGE>
Total Return (for the period ended December 31, 1997)
<TABLE>
<CAPTION>
ISI Shares(1) Wilshire 5000 Index(2) Consumer Price Index(3)
<S> <C> <C> <C>
Since Inception........................ 2.41% (9/16/97) 2.49% 0.62%
</TABLE>
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(1) Assumes the reinvestment of dividends and capital gains distributions.
(2) The Wilshire 5000 Index is an unmanaged index that is a widely recognized
indicator of general market performance.
(3) The Consumer Price Index is a statistical measure of charge, over time,
in the price of goods and services in major expenditure groups.
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>
<CAPTION>
<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 (as a percentage of offering price)............. None
Maximum Deferred Sales Charge (as a percentage of original purchase price or redemption
proceeds, whichever is lower)........................................................................ 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%
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Total Annual Fund Operating Expenses................................................................. 2.25%
=====
</TABLE>
Management and Administration Fees
The Advisor is currently waiving its fee so that the Fund's Total Operating
Expenses do not exceed 1.00%. This waiver is voluntary and may be discontinued
at any time. For the period from September 16, 1997 (commencement of operations)
through May 31, 1998, both the Advisor and the Fund's administrator waived their
fees. Due to these waivers, the Fund's Total Operating Expenses were reduced
from 2.25% to 1.00%.
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.
2
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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
------ ------- ------- --------
$267 $716 $1196 $2514
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 defensive 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. 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
3
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(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 U.S. 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. 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.
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.
4
<PAGE>
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,
5
<PAGE>
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 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.
6
<PAGE>
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:
7
<PAGE>
<TABLE>
<CAPTION>
Sales Charge as % of
- --------------------------------------------------------------------------------------------------------------------
Offering Net Amount Invested
Amount of Purchase Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The sales charge you pay on your current purchase of Shares may be
reduced under the circumstances listed below.
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.
8
<PAGE>
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 are exchanging an investment in any other mutual fund or any
closed-end Fund for shares of this Fund. (See "Purchases by Exchange
for a description of the conditions.)
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.
In addition, until February 28, 1999, you may exchange shares of any
other mutual fund on which you have paid a sales charge, or shares of any
closed-end fund, for an equal dollar amount of Shares without payment of the
sales charges described above or any other charge.
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.
9
<PAGE>
Redemption Price
The price you receive when you redeem shares will be the net asset
value per share.
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 $___ 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 $___ million in
net assets as of July 31, 1998. Wilshire is a registered investment advisor
with approximately $_ billion of net assets under management as of July 31,
1998.
10
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As compensation for their services for the period from September 16,
1997 (commencement of operations) through the fiscal year ended May 31, 1998,
both ISI and Wilshire waived their respective 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 1[8] 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 U.S. equity securities since the Fund's
inception. Mr. Stevens, a Vice President of the Fund, has served as a 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,
11
<PAGE>
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.
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<PAGE>
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.
(For a share outstanding throughout each 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%.
13
<PAGE>
<TABLE>
<CAPTION>
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. The minimum initial purchase is $5,000, except that the minimum initial purchase for
qualified retirement plans or IRAs is $1,000 and the minimum initial purchase for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent purchase requires a $250 minimum, except that the minimum subsequent purchase under the
Fund's Automatic Investing Plan is $100 for monthly purchases and $250 for quarterly purchases. The Fund reserves the right
not to accept checks for more than $50,000 that are not certified or bank checks.
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Your Account Registration (Please Print) ---------------------------------------------------------------------
Existing Account No., if any
Individual or Joint Tenant Gifts to Minors
- -------------------------------------------------------- ---------------------------------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)
- -------------------------------------------------------- ---------------------------------------------------------------------
Social Security Number Minor's Name (only one)
- -------------------------------------------------------- ---------------------------------------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor // Minor's Date of Birth (Mo/Day/Year)
under the ________________________ Uniform Gifts to Minors Act
State of Residence
- --------------------------------------------------------
Social Security Number
Corporations, Trusts, Partnerships, etc. Mailing Address
- -------------------------------------------------------- ---------------------------------------------------------------------
Name of Corporation, Trust or Partnership Street
- -------------------------------------------------------- ---------------------------------------------------------------------
Tax ID Number City State Zip
( )
- -------------------------------------------------------- ---------------------------------------------------------------------
Name of Trustees (If to be included in the Registration) 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 shares of 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
--------- ----------- ------------ ------------
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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
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14
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<TABLE>
<CAPTION>
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Call (800) 882-8585 for information about reinvesting your dividends in other funds in the ISI Family of Funds.
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 No., if any Depositor's Signature Date
(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
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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.
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I acknowledge that I am of legal age in the state of my residence. I have received a copy of the Fund's prospectus. I acknowledge
that the telephone redemption and exchange privileges are automatic and will be effected as described in the Fund's current
prospectus (see "Telephone Transactions"). I also acknowledge that I may bear the risk of loss in the event of fraudulent use of
such privileges. If I do not want telephone redemption or exchange privileges, I have so indicated on this Application.
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The Internal Revenue Service does not require your consent to any provision of this document other than the certifications required
to avoid backup withholding.
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___________________________________________________ _____________________________________________________________
Signature Date Signature (if a joint account, both must sign) Date
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For Dealer Use Only
Dealer's Name: ____________________________________ Dealer Code: _____________________________
Dealer's Address: _________________________________ Branch Code: _____________________________
_________________________________
Representative: _________________________________ Rep. No.: ________________________________
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15
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<CAPTION>
ISI STRATEGY FUND, INC.
ISI SHARES CLASS
Investment Advisor
INTERNATIONAL STRATEGY & INVESTMENT INC.
717 Fifth Avenue
New York, New York 10022
<S> <C>
Sub-Advisor Distributor
WILSHIRE ASSOCIATES INCORPORATED INTERNATIONAL STRATEGY & INVESTMENT GROUP INC.
1299 Ocean Avenue, Suite 700 717 Fifth Avenue
Santa Monica, California 90401 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
Transfer Agent Custodian
INVESTMENT COMPANY CAPITAL CORP. BANKERS TRUST COMPANY
One South Street 130 Liberty Street
Baltimore, Maryland 21202 New York, New York 10006
1-800-882-8585
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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16
<PAGE>
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
17
<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 Prospectuses dated October 1, 1998
relating to ISI Strategy Fund Shares
and
Wilshire Institutional Strategy Fund Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History.....................................1
2. Investment Objectives and Policies..................................1
3. Valuation of Shares and Redemption..................................7
4. Federal Tax Treatment of Dividends and Distributions................7
5. Management of the Fund.............................................10
6. Investment Advisory and Other Services.............................15
7. Administration.....................................................17
8. Distribution of Fund Shares........................................17
9. Brokerage .......................................................20
10. Capital Shares.....................................................21
11. Semi-Annual Reports................................................22
12. Custodian, Transfer Agent and Accounting Services..................22
13. Independent Auditors...............................................23
14. Legal Matters......................................................23
15. Control Persons and Principal Holders of Securities................23
16. Performance Computations...........................................23
17. Financial Statements...............................................24
<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 two classes of shares:
ISI Strategy Fund Shares (the "ISI Shares") and Wilshire Institutional
Strategy Fund Shares (the "Institutional Shares"). Currently, the Fund only
offers 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.
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.
2. 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
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an active asset allocation strategy that involves apportioning the Fund's
assets between diversified investments in U.S. equity securities 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 U.S. equity securities 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
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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.
U. S. Equity Securities
The Fund will invest in U.S. equity securities, 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 U.S. 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
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<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
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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
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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.
3. 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.
4. 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% or at a rate of 28% depending upon the holding period of the
Fund in the underlying asset generating the net capital gain, 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
-9-
<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 eighteen months, mid-term capital gain or loss if
shares have been held for more than twelve, but less than eighteen months, and
otherwise will be short-term capital gain or loss. 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.
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
-10-
<PAGE>
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.
5. 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. Managing Director Emeritus, BT Alex. Brown Incorporated;
Vice Chairman, Alex. Brown Capital Advisory & Trust Company
(registered investment advisor); Director, Virginia Hot Springs
Inc. and Director, Investment Company Capital Corp. (registered
investment advisor); Formerly, Vice Chairman, Alex. Brown
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).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Formerly
Director/Trustee, AIM Funds (registered investment companies);
Consultant, Wendell & Stockel Associates, Inc.
(consulting firm); General Manager, Shell Oil Company.
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).
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.
-12-
<PAGE>
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.,
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.
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 13 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 six other funds in the Fund
-13-
<PAGE>
Complex. Messrs. Cunnane, Kroeger, Levy and McDonald serve as Directors of
each fund in the Fund Complex. Ms. Rimel and Mr. Vogt each serve as a Director
of 11 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 17, 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.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
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 $0 $0 $0
Chairman
*Truman T. Semans $0 $0 $0
Vice Chairman
*R. Alan Medaugh $0 $0 $0
Director and President
*Michael J. Napoli, Jr. $0 $0 $0
Director
James J. Cunnane $17 + $39,000 for service on 13
Director Boards in the Fund Complex
John F. Kroeger $21 + $49,000 for service on 13
Director Boards in the Fund Complex
Louis E. Levy $17 + $39,000 for service on 13
Director Boards in the Fund Complex
Eugene J. McDonald $17 + $39,000 for service on 13
Director Boards in the Fund Complex
Rebecca W. Rimel $17 + $39,000 for service on 11(1)
Director Boards in the Fund Complex
Carl W. Vogt, Esq. $17 + $39,000 for service on 11(1)
Director Boards in the Fund Complex
</TABLE>
-14-
<PAGE>
- ---------
* Denotes an individual who is an "interested person" as defined in the
Investment Company Act.
+ 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.
(1) 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. Kroeger, 15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5
years; for Ms. Rimel, 2 years and for Mr. Vogt, 2 years.
<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
-15-
<PAGE>
Investors and the BT Alex. Brown Cash Reserve Fund, Inc. 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.
6. 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 $______
million as of ____________, 1998.
Wilshire, a California corporation, is a registered investment
advisor with approximately $_ billion in net assets under management as of
July 31, 1998. Wilshire currently provides investment advisory services to [8]
open-end registered investment companies with $___ 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
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<PAGE>
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 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.
7. 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 .12% of the Fund's average daily net assets. ICC
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<PAGE>
has voluntarily agreed to waive its fee until the earlier of such time as the
Fund has $50 million in net assets or has been in operation for one year.
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.
8. 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 two separate Distribution Agreements, one for each class of the
Fund's shares (collectively the "Distribution Agreements"). ISI Group, a
Delaware corporation, is a broker-dealer that was formed in 1991 and is an
affiliate of the Advisor.
The Distribution Agreements provide that ISI Group has the
exclusive right to distribute the related class of 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; with respect to the ISI shares class, 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 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 Agreements further provide 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 .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.
ISI Group receives no compensation for distributing the
Institutional Shares.
-18-
<PAGE>
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 ISI Shares Distribution
Agreement, and ISI Group is authorized to make payments out of its fees to
Participating Dealers.
Each of the Distribution Agreements have an initial term of
two years. The Distribution Agreements and, in the case of the ISI Shares
Distribution Agreement, the Plan encompassed therein 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 Agreements, forms of Agency Distribution Agreements
and the ISI Plan were most recently approved by the Fund's Board of Directors,
including a majority of the Independent Directors on September 16, 1997.
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 ISI Shares Distribution Agreement without
the approval of the Fund's shareholders. The ISI Plan may be terminated at any
time, and the Distribution Agreements 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 Agreements may be terminated in the same manner at any
time. The Distribution Agreements and any Agency Distribution Agreements 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 ISI Shares Distribution Agreement, to Participating Dealers 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.
-19-
<PAGE>
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 .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 ISI Shares 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 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, printing and mailing
proxy statements and reports to shareholders; fees and travel expenses of
Disinterested Directors and Disinterested 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.
9. 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.
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<PAGE>
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 transactions effected on an agency basis
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 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, on an agency basis,
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 ISI
Shares 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.
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<PAGE>
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.
[Identify any such securities. 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.
10. 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 two classes of shares: ISI Strategy Fund Shares and Wilshire
Institutional 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 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.
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.
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<PAGE>
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.
11. 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.
12. 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 $10.12 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.
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.
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<PAGE>
13. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by
the Fund's independent auditors, Deloitte & Touche LLP.
14. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
15. 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.
16. 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.
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
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<PAGE>
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%
- ------------------------------------------------------------------------------
Wilshire/Class N/A* N/A
Institutional
- ------------------------------------------------------------------------------
- ----------------
*Wilshire Institutional Shares were not in operation in the period ending May
31, 1998.
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 rate was 20.08%.
17. FINANCIAL STATEMENTS
See next page.
<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
<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
25
<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
<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
26
<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
<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
27
<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
-----------
<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
28
<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
<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
29
<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
<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
30
<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
<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
31
<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
<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
32
<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
<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
33
<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
<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
34
<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
<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
35
<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
<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
36
<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
<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
-----------
37
<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
<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.
38
<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.
39
<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.
40
<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.
41
<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.
42
<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.
43
<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.
- --------------------------------------------------------------------------------
44
<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
45
<PAGE>
PART C. OTHER INFORMATION
-----------------
Item 23. Exhibits
(a)(1) Articles of Incorporation, incorporated by
reference to Exhibit 1(a) to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-97-001293) on July 11, 1997.
(a)(2) Articles of Amendment to Articles of
Incorporation, incorporated by reference to
Exhibit 1(b) to Registrant's Registration
Statement on Form N-1A (File No. 333-31127),
filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-
001293) on July 11, 1997.
(b) By-Laws, incorporated by reference to Exhibit
2 to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with
the Securities and Exchange Commission via
EDGAR (Accession No. 950116-97-001293) on
July 11, 1997.
(c) Instruments Defining Rights of Securities
Holders, incorporated by reference to Exhibit
1 (Articles of Incorporation, Articles of
Amendment) and Exhibit 2 (By-Laws) of
Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-97-001534) on August 15, 1997.
(d)(1) Investment Advisory Agreement between
Registrant and International Strategy &
Investment Inc., incorporated by reference to
Exhibit 5(a) of Post-Effective Amendment No. 1
to Registrant's Registration Statement on Form
N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR
(Accession No. 950116-98-000491) on February
26, 1998.
(d)(2) Sub-Advisory Agreement among Registrant,
International Strategy & Investment Inc. and
Wilshire Associates Incorporated, incorporated
by reference to Exhibit 5(b) of Post-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A (File No. 333-31127),
filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-
000491) on February 26, 1998.
(e)(1) Distribution Agreement between Registrant and
International Strategy & Investment Group Inc.
with respect to the ISI Shares Class,
incorporated by reference to Exhibit 6(a) of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-98-000491) on February 26, 1998.
(e)(2) Form of Distribution Agreement between
Registrant and International Strategy &
Investment Group Inc. with respect to the
Institutional Shares Class, incorporated by
reference to Exhibit 6(b) to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-97-001293) on July 11, 1997.
(e)(3) Form of Agency Distribution Agreement between
International Strategy & Investment Group Inc.
and Participating Broker-Dealers, incorporated
by reference to Exhibit 6(c) to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-97-001293) on July 11, 1997.
<PAGE>
(e)(4) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents,
incorporated by reference to Exhibit 6(d) to
Registrant's Registration Statement on Form
N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR
(Accession No. 950116-97-001293) on July 11,
1997.
(f) None;
(g) Custodian Agreement dated August 11,
1997 between Registrant and Bankers Trust
Company, filed herewith.
(h) Master Services Agreement (including
Administration, Transfer Agency and
Accounting Services appendices) between
Registrant and Investment Company Capital
Corp., incorporated by reference to Exhibit 9
of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR
(Accession No. 950116-98-000491) on February
26, 1998.
(i) Opinion of Counsel, incorporated by reference
to Exhibit 10 of Pre-Effective Amendment No.
1 to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with
the Securities and Exchange Commission via
EDGAR (Accession No. 950116-97-001534) on
August 15, 1997.
(j) Consent of Independent Auditors, filed
herewith;
(k) None;
(l) Subscription Agreement re: initial $100,000
capital, incorporated by reference to Exhibit
13 of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR
(Accession No. 950116-98-000491) on February
26, 1998.
(m) Distribution Plan with respect to the ISI
Shares Class, incorporated by reference to
Exhibit 15 of Post-Effective Amendment No. 1
to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with
the Securities and Exchange Commission via
EDGAR (Accession No. 950116-98-000491) on
February 26, 1998.
(n) Financial Data Schedule, filed herewith.
(o) Rule 18f-3 Plan, incorporated by reference to
Exhibit 18 of Post-Effective Amendment No. 1
to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with
the Securities and Exchange Commission via
EDGAR (Accession No. 950116-98-000491) on
February 26, 1998.
(p) Powers of Attorney, incorporated by reference
to Exhibit 24 of Post-Effective Amendment No.
1 to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with
the Securities and Exchange Commission via
EDGAR (Accession No. 950116-98-000491) on
February 26, 1998.
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Provide a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant. For any person
controlled by another person, disclose the percentage of voting securities
owned by the immediately controlling person or other basis of that person's
control. For each company, also provide the state or other sovereign power
under the laws of which the company is organized.
None.
Item 25. Indemnification
---------------
State the general effect of any contract, arrangements or
statute under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified against any liability incurred in
their official capacity, other than insurance provided by any director,
officer, affiliated person or underwriter for their own protection.
Sections 1, 2, 3 and 4 of Article VIII of Registrant's
Articles of Incorporation, included as Exhibit (a) to this Registration
Statement and incorporated herein by reference, provide as follows:
Section 1. To the fullest extent that limitations on the
liability of directors and officers are permitted by the
Maryland General Corporation Law, no director or officer
of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This
limitation on liability applies to events occurring at
the time a person serves as a director or officer of the
Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability
is asserted.
Section 2. The Corporation shall indemnify and advance
expenses to its currently acting and its former
directors to the fullest extent that indemnification of
directors is permitted by the Maryland General
Corporation Law. The Corporation shall indemnify and
advance expenses to its officers to the same extent as
its directors and to such further extent as is
consistent with law. The Board of Directors of the
Corporation may make further provision for
indemnification of directors, officers, employees and
agents in the By-Laws of the Corporation or by
resolution or agreement to the fullest extent permitted
by the Maryland General Corporation law.
Section 3. No provision of this Article VIII shall be
effective to protect or purport to protect any director
or officer of the Corporation against any liability to
the Corporation or its security holders to which he
would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office.
Section 4. References to the Maryland General
Corporation Law in this Article VIII are to such law as
from time to time amended. No further amendment to the
Charter of the Corporation shall decrease, but may
expand, any right of any person under this Article VIII
based on any event, omission or proceeding prior to such
amendment.
Sections 1, 2, 3, 4 and 5 of Article XIII of
Registrant's By-Laws, included as Exhibit (b) to this
Registration Statement and incorporated herein by
reference, provide as follows:
Section 1. Indemnification. The Corporation shall
indemnify its Directors to the fullest extent that
indemnification of Directors is permitted by the
Maryland General Corporation Law. The Corporation shall
indemnify its officers to the same extent as its
Directors and to such further extent as is consistent
with law. The Corporation shall indemnify its Directors
and officers who while serving as Directors or officers
also serve at the request of the Corporation as a
Director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint
venture, trust, other enterprise or employee benefit
plan to the fullest extent consistent with law. This
Article XIII shall not protect any such person against
any liability to the Corporation or any shareholder
thereof to which such person would otherwise be subject
by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved
in the conduct of his office.
<PAGE>
Section 2. Advances. Any current or former Director or
officer of the Corporation claiming indemnification
within the scope of this Article XIII shall be entitled
to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with
proceedings to which he is a party in the manner and to
the full extent permissible under the Maryland General
Corporation Law, the Securities Act of 1933 (the "1933
Act") and the 1940 Act, as such statutes are now or
hereafter in force.
Section 3. Procedure. On the request of any current or
former Director or officer requesting indemnification or
an advance under this Article XIII, the Board of Directors
shall determine, or cause to be determined, in a manner
consistent with the Maryland General Corporation Law, the
1933 Act and the 1940 Act, as such statutes are now or
hereafter in force, whether the standards required by this
Article XIII have been met.
Section 4. Other Rights. The indemnification provided by
this Article XIII shall not be deemed exclusive of any
other right, in respect of indemnification or otherwise,
to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of
shareholders or disinterested Directors or otherwise,
both as to action by a Director or officer of the
Corporation in his official capacity and as to action by
such person in another capacity while holding such
office or position, and shall continue as to a person
who has ceased to be a Director or officer and shall
inure to the benefit of the heirs, executors and
administrators of such a person.
Section 5. Maryland Law. References to the Maryland
General Corporation Law in this Article XIII are to such
law as from time to time amended.
Insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
of a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person in connection with the securities being registered) the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue. In the absence of a determination by a court of
competent jurisdiction, the determinations that indemnification against such
liabilities is proper, and advances can be made, are made by a majority of a
quorum of the disinterested directors of the Fund, or an independent legal
counsel in a written opinion, based on review of readily available facts.
Item 26. Business and Other Connections of the Investment Advisor
--------------------------------------------------------
Describe any other business, profession, vocation or
employment of a substantial nature in which the
investment advisor and each director, officer or partner
of the advisor, is or has been, engaged within the last
two fiscal years, for his or her own account or in the
capacity of director, officer, employee, partner or
trustee. (Disclose the name and principal business
address of any company for which a person listed above
serves in the capacity of director, officer, employee,
partner or trustee, and the nature of the relationship.)
During the last two fiscal years, no director or officer
of International Strategy & Investment Inc., the
Registrant's investment advisor, has engaged in any
other business, profession, vocation or employment of a
substantial nature other than that of the business of
investment management and, through affiliates,
investment banking.
Describe any other business, profession, vocation or
employment of a substantial nature in which the
investment sub-advisor, and each director, officer or
partner of the sub-advisor, is or has been, engaged
within the last two fiscal years, for his or her own
account or in the capacity of director, officer,
employee, partner, or trustee. (Disclose the name and
principal business address of any company for which a
person listed above serves in the capacity of director,
officer, employee, partner or trustee, and the nature of
the relationship.)
<PAGE>
The list required by this Item 26 of officers and
directors of Wilshire Associates Incorporated, together
with the information as to any other business,
profession, vocation or employment of substantial nature
engaged in by such officers and directors during the
past two years, is incorporated by reference to
Schedules A and D of Form ADV filed by Wilshire
Associates Incorporated pursuant to the Investment
Advisors Act of 1940 (File No. 801-36233).
Item 27. Principal Underwriters
(a) State the name of each investment company (other than
the Registrant) for which each principal underwriter
currently distributing the Fund's securities also acts
as principal underwriter, depositor or investment
advisor.
International Strategy & Investment Group Inc. acts as
distributor for ISI Total Return U.S. Treasury Fund
Shares (a class of Total Return U.S. Treasury Fund, Inc.),
ISI Managed Municipal Fund Shares (a class of Managed
Municipal Fund, Inc.) and ISI North American Government
Bond Fund Shares (a class of North American Government
Bond Fund, Inc.).
(b) Provide the information required by the following table
for each director, officer or partner of each principal
underwriter named in response to Item 20.
Name and Principal Position and Offices with Position and Offices
Business Address* Principal Underwriter with Registrant
------------------ ------------------------- --------------------
Edward S. Hyman Chairman, Chief Executive Chairman
Officer and Director and Director
R. Alan Medaugh Director President
and Director
Nancy Lazar Executive Vice President
Vice President
and Director
Joel Fein Chief Financial None
Officer
---------------------
* 717 Fifth Avenue
New York, New York 10022
(c) Not applicable.
Item 28. Location of Accounts and Records
--------------------------------
State the name and address of each person maintaining
principal possession of each account, book or other document required to be
maintained by section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the
rules under that section.
International Strategy & Investment Inc., 717 Fifth Avenue,
New York, New York 10022, the Registrant's investment advisor,
maintains physical possession of each such account, book or other
document of the Fund, except for those maintained by the Registrant's
sub-advisor, Wilshire Associates Incorporated, 1299 Ocean Avenue,
Suite 700, Santa Monica, CA 90401, the Registrant's distributor,
International Strategy & Investment Group, Inc., 717 Fifth Avenue,
New York, New York 10022, the Registrant's custodian, Bankers Trust
Company, 130 Liberty Street, New York, NY 10006, or by the
Registrant's administrator, transfer agent, dividend disbursing agent
and accounting services provider, Investment Company Capital Corp.,
One South Street, Baltimore, MD 21202.
<PAGE>
In particular, with respect to the records required by Rule
31a-1(b)(1), ICC and ISI each maintains physical possession of all
journals containing itemized daily records of all purchases and sales
of securities, including sales and redemptions of Fund securities,
and Bankers Trust Company maintains physical possession of all
receipts and deliveries of securities (including certificate numbers
if such detail is not recorded by the custodian or transfer agent), all
receipts and disbursements of cash, and all other debts and credits.
Item 29. Management Services
-------------------
Provide a summary of the substantive provisions of any
management-related service contract not discussed in Part A or Part B
disclosing the parties to the contract and the total amount paid and by whom,
for the Fund's last three fiscal years.
See Exhibits (g) and (h).
Item 30. Undertakings
In initial registration statements filed under the
Securities Act, provide an undertaking to file an amendment to the
registration statement with certified financial statements showing the initial
capital received before accepting subscriptions from more than 25 persons if
the Fund intends to raise its initial capital under section 14(a)(3)[15U.S.C.
80a-14(a)(3)].
Not applicable.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized in the City of Baltimore,
in the State of Maryland, on the 31st day of July, 1998.
ISI STRATEGY FUND, INC.
By: /s/ R. Alan Medaugh
----------------------------
R. Alan Medaugh
President and Director
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities on the date(s) indicated:
* Chairman and Director July 31, 1998
- ----------------------- -------------
Edward S. Hyman Date
* Director July 31, 1998
- ----------------------- -------------
James J. Cunnane Date
* Director July 31, 1998
- ----------------------- -------------
John F. Kroeger Date
* Director July 31, 1998
- ----------------------- -------------
Louis E. Levy Date
* Director July 31, 1998
- ----------------------- -------------
Eugene J. McDonald Date
* Director July 31, 1998
- ----------------------- -------------
Michael J. Napoli, Jr. Date
* Director July 31, 1998
- ----------------------- -------------
Rebecca W. Rimel Date
* Director July 31, 1998
- ----------------------- -------------
Truman T. Semans Date
* Director July 31, 1998
- ----------------------- -------------
Carl W. Vogt, Esq. Date
/s/ R. Alan Medaugh President and Director July 31, 1998
- ------------------------ -------------
R. Alan Medaugh Date
/s/ Joseph A. Finelli Chief Financial July 31, 1998
- ------------------------ and Accounting -------------
Joseph A. Finelli Officer Date
* By: /s/Amy M. Olmert
------------------
Attorney-In-Fact
<PAGE>
ISI STRATEGY FUND, INC.
INDEX OF EXHIBITS
------------------------------------------------------------------
EDGAR
Exhibit Document
Number
------------------------------------------------------------------
(a)(1) Articles of Incorporation, incorporated by reference to
Exhibit 1(a) to Registrant's Registration Statement on
Form N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 950116-97-001293) on July 11, 1997.
(a)(2) Articles of Amendment to Articles of Incorporation,
incorporated by reference to Exhibit 1(b) to
Registrant's Registration Statement on Form N-1A (File
No. 333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001293)
on July 11, 1997.
(b) By-Laws, incorporated by reference to Exhibit
2 to Registrant's Registration Statement on Form N-1A
(File No. 333-31127), filed with the Securities and
Exchange Commission via EDGAR (Accession No.
950116-97-001293) on July 11, 1997.
(c) Instruments Defining Rights of Securities Holders,
incorporated by reference to Exhibit 1 (Articles of
Incorporation, Articles of Amendment) and Exhibit 2
(By-Laws) of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File
No. 333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001534)
on August 15, 1997.
(d)(1) Investment Advisory Agreement between Registrant and
International Strategy & Investment Inc., incorporated
by reference to Exhibit 5(a) of Post-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 950116-98-000491) on February 26, 1998.
(d)(2) Sub-Advisory Agreement among Registrant, International
Strategy & Investment Inc. and Wilshire Associates
Incorporated, incorporated by reference to Exhibit 5(b)
of Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
(e)(1) Distribution Agreement between Registrant and
International Strategy & Investment Group Inc. with
respect to the ISI Shares Class, incorporated by
reference to Exhibit 6(a) of Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form
N-1A (File No. 333-31127), filed with the Securities
and Exchange Commission via EDGAR (Accession No.
950116-98-000491) on February 26, 1998.
(e)(2) Form of Distribution Agreement between Registrant and
International Strategy & Investment Group Inc. with
respect to the Institutional Shares Class, incorporated
by reference to Exhibit 6(b) to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001293)
on July 11, 1997.
(e)(3) Form of Agency Distribution Agreement between
International Strategy & Investment Group Inc. and
Participating Broker-Dealers, incorporated by reference
to Exhibit 6(c) to Registrant's Registration Statement
on Form N-1A (File No. 333-31127), filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 950116-97-001293) on July 11, 1997.
<PAGE>
ISI STRATEGY FUND, INC.
INDEX OF EXHIBITS
------------------------------------------------------------------
EDGAR
Exhibit Document
Number
------------------------------------------------------------------
(e)(4) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents
incorporated by reference to Exhibit 6(d) to
Registrant's Registration Statement on Form N-1A (File
No. 333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001293) on
July 11, 1997.
(f) None;
EX-99.B (g) Custodian Agreement dated August 11, 1997 between
Registrant and Bankers Trust Company, filed herewith.
(h) Master Services Agreement (including Administration,
Transfer Agency and Accounting Services appendices)
between Registrant and Investment Company Capital Corp.
incorporated by reference to Exhibit 9 of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
(i) Opinion of Counsel incorporated by reference to Exhibit
10 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No. 333-
31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-97-001534)
on August 15, 1997.
EX-99.B (j) Consent of Independent Auditors, filed herewith;
(k) None;
(l) Subscription Agreement re: initial $100,000 capital
incorporated by reference to Exhibit 13 of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
(m) Distribution Plan with respect to the ISI Shares Class
incorporated by reference to Exhibit 15 of
Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
EX-99.B (n) Financial Data Schedule, filed herewith.
(o) Rule 18f-3 Plan incorporated by reference to Exhibit 18
of Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (File No.
333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
(p) Powers of Attorney incorporated by reference to
Exhibit 24 of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A (File
No. 333-31127), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 950116-98-000491)
on February 26, 1998.
<PAGE>
Mutual Fund/Corporation/Non-Series
CUSTODIAN AGREEMENT
AGREEMENT dated as of the 11th day of August, 1997 between BANKERS TRUST
COMPANY (the "Custodian") and ISI STRATEGY FUND, INC. (the "Customer").
WHEREAS, the Customer desires to appoint the Custodian as custodian on behalf
of the Customer under the terms and conditions set forth in this Agreement,
and the Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
1. Employment of Custodian. The Customer hereby employs the Custodian as
custodian of all assets of the Customer which are delivered to and accepted by
the Custodian or any Subcustodian (as that term is defined in Section 4) (the
"Property") pursuant to the terms and conditions set forth herein. Without
limitation, such Property shall include stocks and other equity interests of
every type, evidences of indebtedness, other instruments representing same or
rights or obligations to receive, purchase, deliver or sell same and other
non-cash investment property of the Customer which is acceptable for deposit
("Securities") and cash from any source and in any currency ("Cash"). The
Custodian shall not be responsible for any property of the Customer held or
received by the Customer or others and not delivered to the Custodian or any
Subcustodian.
2. Maintenance of Securities and Cash at Custodian and Subcustodian Locations.
Pursuant to Instructions, the Customer shall direct the Custodian to (a)
settle Securities transactions and maintain cash in the country or other
jurisdiction in which the principal trading market for such Securities is
located, where such Securities are to be presented for payment or where such
Securities are acquired and (b) maintain cash and cash equivalents in such
countries in amounts reasonably necessary to effect the Customer's
transactions in such Securities. Instructions to settle Securities
transactions in any country shall be deemed to authorize the holding of such
Securities and Cash in that country.
3. Custody Account. The Custodian agrees to establish and maintain custody
account or accounts on its books in the name of the Customer (the "Account")
for any and all Property received and accepted by the Custodian or any
Subcustodian for the account of the Customer. The Custodian shall have the
right, in its sole discretion, to refuse to accept any Property that is not in
proper form for deposit for any reason. The Customer acknowledges its
responsibility as a principal for all of its obligations to the Custodian
arising under or in connection with this Agreement, warrants its authority to
deposit in the Account any Property received therefor by the Custodian or a
Subcustodian and to give, and authorize others to give, instructions relative
thereto. The Custodian may deliver securities of the same class in place of
those deposited in the Account.
The Custodian shall hold, keep safe and protect as custodian for Account, on
behalf of the Customer, all Property in such Account. All transactions,
including, but not limited to, foreign exchange transactions, involving the
Property shall be executed or settled solely in accordance with Instructions,
except that until the Custodian receives Instructions to the contrary, the
Custodian will:
(a) collect all interest and dividends and all other income and payments,
whether paid in cash or in kind, on the Property, as the same become
payable and credit the same to the Account;
<PAGE>
(b) present for payment all Securities held in the Account which are
called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon
presentation to the extent that the Custodian or Subcustodian is
actually aware of such opportunities and hold the cash received in
the Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely ministerial
(including, without limitation, the exchange of temporary securities
for those in definitive form and the exchange of warrants, or other
documents of entitlement to securities, for the Securities
themselves) and (ii) when notification of a tender or exchange offer
(other than ministerial exchanges described in (i)above) is received
for the Account, endeavor to receive Instructions, provided that if
such Instructions are not received in time for the Custodian to take
timely action, no action shall be taken with respect thereto;
(d) whenever notification of a rights entitlement or a fractional
interest resulting from a rights issue, stock dividend or stock split
is received for the Account and such rights entitlement or fractional
interest bears an expiration date, if after endeavoring to obtain
Instructions such Instructions are not received in time for the
Custodian to take timely action or if actual notice of such actions
was received too late to seek Instructions, sell in the discretion of
the Custodian (which sale the Customer hereby authorizes the
Custodian to make) such rights entitlement or fractional interest and
credit the Account with the net proceeds of such sale;
(e) execute in the Customer's name for the Account, whenever the
Custodian deems it appropriate, such ownership and other certificates
as may be required to obtain the payment of income from the Property
in the Account;
(f) pay for the Account, any and all taxes and levies in the nature of
taxes imposed on interest, dividends or other similar income on the
Property in the Account by any governmental authority. In the event
there is insufficient Cash available in the Account to pay such taxes
and levies, the Custodian shall notify the Customer of the amount of
the shortfall and the Customer, at its option, may deposit additional
Cash in the Account or take steps to have sufficient Cash available.
The Customer agrees, when and if requested by the Custodian and
required in connection with the payment of any such taxes to
cooperate with the Custodian in furnishing information, executing
documents or otherwise; and
(g) appoint brokers and agents for any of the ministerial transactions
involving the Securities described in (a) - (f), including, without
limitation, affiliates of the Custodian or any Subcustodian.
4. Subcustodians and Securities Systems. The Customer authorizes and
instructs the Custodian to hold the Property in the Account in
custody accounts which have been established by the Custodian with
(a) one of its U.S. branches or another U.S. bank or trust company or
branch thereof located in the U.S. which is itself qualified under
the Investment Company Act of 1940, as amended ("1940 Act"), to act
as custodian (individually, a "U.S. Subcustodian"), or a U.S.
securities depository or clearing agency or system in which the
Custodian or a U.S. Subcustodian participates (individually, a "U.S.
Securities System") or (b) one of its non-U.S. branches or
majority-owned non-U.S. subsidiaries, a non-U.S. branch or
majority-owned subsidiary of a U.S. bank or a non-U.S. bank or trust
company, acting as custodian (individually, a "non-U.S.
Subcustodian"; U.S. Subcustodians and non-U.S. Subcustodians,
collectively, "Subcustodians"), or a non-U.S. depository or clearing
agency or system in which the Custodian or any Subcustodian
participates (individually, a "non-U.S. Securities System"; U.S.
Securities System and non-U.S. Securities System, collectively,
"Securities System"),
<PAGE>
provided that in each case in which a U.S. Subcustodian or U.S.
Securities System is employed, each such Subcustodian or Securities
System shall have been approved by Instructions; provided further
that in each case in which a non-U.S. Subcustodian or non-U.S.
Securities System is employed, (a) such Subcustodian or Securities
System either is (i) a "qualified U.S. bank" as defined by Rule 17f-5
under the 1940 Act ("Rule 17f-5") or (ii) an "eligible foreign
custodian" within the meaning of Rule 17f-5 or such Subcustodian or
Securities System is the subject of an order granted by the U.S.
Securities and Exchange Commission ("SEC") exempting such agent or
the subcustody arrangements thereto from all or part of the
provisions of Rule 17f-5 and (b) the agreement between the Custodian
and such non-U.S. Subcustodian has been approved by Instructions; it
being understood that the Custodian shall have no liability or
responsibility for determining whether the approval of any
Subcustodian or Securities System has been proper under the 1940 Act
or any rule or regulation thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the
employment of any Subcustodian or Securities System with respect to
the Customer, and if desirable and practicable, appoint a replacement
subcustodian or securities system in accordance with the provisions
of this Section. In addition, the Custodian may, at any time in its
discretion, upon written notification to the Customer, terminate the
employment of any Subcustodian or Securities System.
Upon request of the Customer, the Custodian shall deliver to the
Customer annually a certificate stating: (a) the identity of each
non-U.S. Subcustodian and non-U.S. Securities System then acting on
behalf of the Custodian and the name and address of the governmental
agency or other regulatory authority that supervises or regulates
such non-U.S Subcustodian and non-U.S. Securities System; (b) the
countries in which each non-U.S. Subcustodian or non-U.S. Securities
System is located; and (c) so long as Rule 17f-5 requires the
Customer's Board of Directors to directly approve its foreign custody
arrangements, such other information relating to such non-U.S.
Subcustodians and non-U.S. Securities Systems as may reasonably be
requested by the Customer to ensure compliance with Rule 17f-5. So
long as Rule 17f-5 requires the Customer's Board of Directors to
directly approve its foreign custody arrangements, the Custodian also
shall furnish annually to the Customer information concerning such
non-U.S. Subcustodians and non-U.S. Securities Systems similar in
kind and scope as that furnished to the Customer in connection with
the initial approval of this Agreement. Custodian agrees to promptly
notify the Customer if, in the normal course of its custodial
activities, the Custodian has reason to believe that any non-U.S.
Subcustodian or non-U.S. Securities System has ceased to be a
qualified U.S. bank or an eligible foreign custodian each within the
meaning of Rule 17f-5 or has ceased to be subject to an exemptive
order from the SEC.
5. Use of Subcustodian. With respect to Property in the Account which is
maintained by the Custodian in the custody of a Subcustodian employed
pursuant to Section 4:
(a) The Custodian will identify on its books as belonging to the
Customer, any Property held by such Subcustodian.
(b) Any Property in the Account held by a Subcustodian will be subject
only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a non-U.S.
Subcustodian with respect to the
<PAGE>
holding of Property shall require that (i) the Account will be
adequately indemnified or its losses adequately insured; (ii) the
Securities are not subject to any right, charge, security interest,
lien or claim of any kind in favor of such Subcustodian or its
creditors except a claim for payment in accordance with such
agreement for their safe custody or administration and expenses
related thereto, (iii) beneficial ownership of such Securities be
freely transferable without the payment of money or value other than
for safe custody or administration and expenses related thereto, (iv)
adequate records will be maintained identifying the Property held
pursuant to such Agreement as belonging to the Custodian, on behalf
of its customers and (v) to the extent permitted by applicable law,
officers of or auditors employed by, or other representatives of or
designated by, the Custodian, including the independent public
accountants of or designated by, the Customer be given access to the
books and records of such Subcustodian relating to its actions under
its agreement pertaining to any Property held by it thereunder or
confirmation of or pertinent information contained in such books and
records be furnished to such persons designated by the Custodian.
6. Use of Securities System. With respect to Property in the Account
which are maintained by the Custodian or any Subcustodian in the
custody of a Securities System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian will be required by its
agreement with the Custodian to, identify on its books such Property
as being held for the account of the Custodian or Subcustodian for
its customers.
(b) Any Property held in a Securities System for the account of the
Custodian or a Subcustodian will be subject only to the instructions
of the Custodian or such Subcustodian, as the case may be.
(c) Property deposited with a Securities System will be maintained in an
account holding only assets for customers of the Custodian or
Subcustodian, as the case may be, unless precluded by applicable law,
rule, or regulation.
(d) The Custodian shall provide the Customer with any report obtained by
the Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System.
7. Agents.The Custodian may at any time or times in its sole discretion
appoint (or remove) any other U.S. bank or trust company which is
itself qualified under the 1940 Act to act as custodian, as its agent
to carry out such of the provisions of this Agreement as the
Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
8. Records, Ownership of Property, Statements, Opinions of Independent
Certified Public Accountants.
(a) The ownership of the Property whether Securities, Cash and/or other
property, and whether held by the Custodian or a Subcustodian or in a
Securities System as authorized herein, shall be clearly recorded on
the Custodian's books as belonging to the Account and not for the
Custodian's own interest. The Custodian shall keep accurate and
detailed accounts of all investments, receipts, disbursements and
other transactions for the Account. All accounts, books and records
of the Custodian relating thereto shall be open to inspection and
audit at all reasonable times during normal business hours by any
person designated by the Customer. All such accounts shall be
maintained
<PAGE>
and preserved in the form reasonably requested by the Customer. The
Custodian will supply to the Customer from time to time, as mutually
agreed upon, a statement in respect to any Property in the Account
held by the Custodian or by a Subcustodian. In the absence of the
filing in writing with the Custodian by the Customer of exceptions or
objections to any such statement within sixty (60) days of the
mailing thereof, the Customer shall be deemed to have approved such
statement and in such case or upon written approval of the Customer
of any such statement, such statement shall be presumed to be for all
purposes correct with respect to all information set forth therein.
(b) The Custodian shall take all reasonable action as the Customer may
request to obtain from year to year favorable opinions from the
Customer's independent certified public accountants with respect to
the Custodian's activities hereunder in connection with the
preparation of the Customer's Form N1A and the Customer's Form NSAR
or other periodic reports to the SEC and with respect to any other
requirements of the SEC.
(c) At the request of the Customer, the Custodian shall deliver to the
Customer a written report prepared by the Custodian's independent
certified public accountants with respect to the services provided by
the Custodian under this Agreement, including, without limitation,
the Custodian's accounting system, internal accounting control and
procedures for safeguarding Cash and Securities, including Cash and
Securities deposited and/or maintained in a securities system or with
a Subcustodian. Such report shall be of sufficient scope and in
sufficient detail as may reasonably be required by the Customer and
as may reasonably be obtained by the Custodian.
(d) The Customer may elect to participate in any of the electronic
on-line service and communications systems offered by the Custodian
which can provide the Customer, on a daily basis, with the ability to
view on-line or to print on hard copy various reports of Account
activity and of Securities and/or Cash being held in the Account. To
the extent that such service shall include market values of
Securities in the Account, the Customer hereby acknowledges that the
Custodian now obtains and may in the future obtain information on
such values from outside sources that the Custodian considers to be
reliable and the Customer agrees that the Custodian (i) does not
verify or represent or warrant either the reliability of such service
nor the accuracy or completeness of any such information furnished or
obtained by or through such service and (ii) shall be without
liability in selecting and utilizing such service or furnishing any
information derived therefrom.
9. Holding of Securities, Nominees, etc. Securities in the Account which
are held by the Custodian or any Subcustodian may be held by such
entity in the name of the Customer, in the Custodian's or
Subcustodian's name, in the name of the Custodian's or Subcustodian's
nominee, or in bearer form. Securities that are held by a
Subcustodian or which are eligible for deposit in a Securities System
as provided above may be maintained with the Subcustodian or the
Securities System in an account for the Custodian's or Subcustodian's
customers, unless prohibited by law, rule, or regulation. The
Custodian or Subcustodian, as the case may be, may combine
certificates representing Securities held in the Account with
certificates of the same issue held by it as fiduciary or as a
custodian. In the event that any Securities in the name of the
Custodian or its nominee or held by a Subcustodian and registered in
the name of such Subcustodian or its nominee are called for partial
redemption by the issuer of such Security, the Custodian may, subject
to the rules or regulations pertaining to allocation of any
Securities System in which such Securities have been deposited,
allot, or cause to be allotted, the called portion of the respective
beneficial holders of such class of security in any manner the
Custodian deems to be fair and equitable.
10. Proxies, etc. With respect to any proxies, notices, reports or other
communications relative to any
<PAGE>
of the Securities in the Account, the Custodian shall perform such
services and only such services relative thereto as are (i) set forth
in Section 3 of this Agreement, (ii) described in Exhibit A attached
hereto (as such service therein described may be in effect from time
to time) (the "Proxy Service") and (iii) as may otherwise be agreed
upon between the Custodian and the Customer. The liability and
responsibility of the Custodian in connection with the Proxy Service
referred to in (ii) of the immediately preceding sentence and in
connection with any additional services which the Custodian and the
Customer may agree upon as provided in (iii) of the immediately
preceding sentence shall be as set forth in the description of the
Proxy Service and as may be agreed upon by the Custodian and the
Customer in connection with the furnishing of any such additional
service and shall not be affected by any other term of this
Agreement. Neither the Custodian nor its nominees or agents shall
vote upon or in respect of any of the Securities in the Account,
execute any form of proxy to vote thereon, or give any consent or
take any action (except as provided in Section 3) with respect
thereto except upon the receipt of Instructions relative thereto.
11. Segregated Account. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations
thereunder, the Custodian shall, upon receipt of Instructions,
establish and maintain a segregated account or accounts on its books
for and on behalf of the Customer.
12. Settlement Procedures. Securities will be transferred, exchanged or
delivered by the Custodian or a Subcustodian upon receipt by the
Custodian of Instructions which include all information required by
the Custodian. Settlement and payment for Securities received for the
Account and delivery of Securities out of the Account may be effected
in accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without
limitation, delivering Securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such
Securities from such purchaser or dealer, as such practices and
procedures may be modified or supplemented in accordance with the
standard operating procedures of the Custodian in effect from time to
time for that jurisdiction or market. The Custodian shall not be
liable for any loss which results from effecting transactions in
accordance with the customary or established securities trading or
securities processing practices and procedures in the applicable
jurisdiction or market.
Notwithstanding that the Custodian may settle purchases and sales
against, or credit income to, the Account, on a contractual basis, as
outlined in the Global Guide provided to the Customer by the
Custodian, the Custodian may, at its sole option, reverse such
credits or debits to the Account in the event that the transaction
does not settle, or the income is not received in a timely manner,
and the Customer agrees to hold the Custodian harmless from any
losses which may result therefrom.
13. Conditional Credits.
(a) Notwithstanding any other provision of this Agreement, the Custodian
shall not be required to comply with any Instructions to settle the
purchase of any securities for the Account, unless there are
sufficient immediately available funds in the relevant currency in
the Account, provided that, if, after all expenses, debits and
withdrawals of Cash in the relevant currency ("Debits") applicable to
the Account have been made and if after all Conditional Credits, as
defined below, applicable to the Account have been made final entries
as set forth in (c) below, the amount of immediately available funds
in the relevant currency in such Account is at least equal to the
aggregate purchase price of all Securities for which the Custodian
has received Instructions to settle on that date
("Settlement Date"), the Custodian, upon settlement, shall credit the
Securities to the Account by
<PAGE>
making a final entry on its books and records.
(b) Notwithstanding the foregoing, if after all Debits applicable to the
Account have been made, there remains outstanding any Conditional
Credit (as defined below) applicable to the Account or the amount of
immediately available funds in a given currency in such Account are
less than the aggregate purchase price in such currency of all
securities for which the Custodian has received Instructions to
settle on the Settlement Date, the Custodian, upon settlement, may
provisionally credit the Securities to the Account by making a
conditional entry on its books and records ("Conditional Credit"),
pending receipt of sufficient immediately available funds in the
relevant currency in the Account.
(c) If, within a reasonable time after the posting of a Conditional
Credit and after all Debits applicable to the Account have been made,
immediately available funds in the relevant currency at least equal
to the aggregate purchase price in such currency of all securities
subject to a Conditional Credit on a Settlement Date are deposited
into the Account, the Custodian shall make the Conditional Credit a
final entry on its books and records. In such case, the Customer
shall be liable to the Custodian only for late charges at a rate
which the Custodian customarily charges for similar extensions of
credit.
(d) If (i) within a reasonable time from the posting of a Conditional
Credit, immediately available funds at least equal to the resultant
Debit on a Settlement Date are not on deposit in the Account, or (ii)
any Proceeding shall occur, the Custodian may sell such of the
Securities subject to the Conditional Credit as it selects in its
sole discretion and shall apply the net proceeds of such sale to
cover such Debit, including related late charges, and any remaining
proceeds shall be credited to the Account. If such proceeds are
insufficient to satisfy such debt in full, the Customer shall
continue to be liable to the Custodian for any shortfall. The
Custodian shall make the Conditional Credit a final entry on its
books as to the Securities not required to be sold to satisfy such
Debit. Pending payment in full by the Customer of the purchase price
for Securities subject to a Conditional Credit, and the Custodian's
making a Conditional Credit a final entry on its books, the Customer
shall have no security entitlement and, unless consented to by the
Custodian, no right to give further Instructions in respect of
Securities subject to a Conditional Credit. The Custodian shall have
the sole discretion to determine which Securities shall be deemed to
have been paid for by the Customer out of funds available in the
Account. Any listing on a report to the Customer of Securities which
are subject to a Conditional Credit shall be deemed for informational
purposes only and such Securities shall not be deemed finally
credited to the Account; accordingly, such Conditional Credit may be
reversed (and any corresponding Debit shall be canceled) by the
Custodian unless and until the Custodian makes a final entry on its
books crediting such Securities to the Account. The term "Proceeding"
shall mean any insolvency, bankruptcy, receivership, reorganization
or similar proceeding relating to the Customer, whether voluntary or
involuntary.
(e) The Customer agrees that it will not intentionally use the Account to
facilitate the purchase of securities without sufficient funds in the
Account (which funds shall not include the expected proceeds of the
sale of the purchased securities).
14. Permitted Transactions. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon
Instructions in accordance Section 15 and only for the purposes
listed below.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions.
<PAGE>
(b) When Securities are called, redeemed or retired, or otherwise become
payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger,
consolidation, reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a pledge
of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of collateral
as specified in Instructions which shall reflect any restrictions
applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer against delivery of the shares to be redeemed to the
Custodian, a Subcustodian or the Customer's transfer agent.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement among
the Customer, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc., relating to compliance with
the rules of The Options Clearing Corporation, the Commodities
Futures Trading Commission and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released
only upon payment to the Custodian of monies for the premium due and
a receipt for the Securities which are to be held in escrow. Upon
exercise of the option, or at expiration, the Custodian will receive
the Securities previously deposited from broker. The Custodian will
act strictly in accordance with Instructions in the delivery of
Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly
when due other than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading or receipt of income from Securities related
transactions.
(n) Upon the termination of this Agreement as set forth in Section 21.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to
verify the purpose for which a transaction is being effected.
<PAGE>
15. Instructions. The term "Instructions" means instructions from the
Customer in respect of any of the Custodian's duties hereunder which
have been received by the Custodian in accordance with Section 22
below (i) in writing (including, without limitation, facsimile
transmission) or by tested telex signed or given by such one or more
person or persons as the Customer shall have from time to time
authorized in writing to give the particular class of Instructions in
question and whose name and (if applicable) signature and office
address have been filed with the Custodian, or (ii) which have been
transmitted electronically through an electronic on-line service and
communications system offered by the Custodian or other electronic
instruction system acceptable to the Custodian, or (iii) a telephonic
or oral communication by one or more persons as the Customer shall
have from time to time authorized to give the particular class of
Instructions in question and whose name has been filed with the
Custodian; or (iv) upon receipt of such other form of instructions as
the Customer may from time to time authorize in writing and which the
Custodian has agreed in writing to accept. Instructions in the form
of oral communications shall be confirmed by the Customer by tested
telex or writing in the manner set forth in clause (i) above, but the
lack of such confirmation shall in no way affect any action taken by
the Custodian in reliance upon such oral instructions prior to the
Custodian's receipt of such confirmation. Instructions may relate to
specific transactions or to types or classes of transactions, and may
be in the form of standing instructions.
The Custodian shall have the right to assume in the absence of notice
to the contrary from the Customer that any person whose name is on
file with the Custodian pursuant to this Section has been authorized
by the Customer to give the Instructions in question and that such
authorization has not been revoked. The Custodian may act upon and
conclusively rely on, without any liability to the Customer or any
other person or entity for any losses resulting therefrom, any
Instructions reasonably believed by it to be furnished by the proper
person or persons as provided above.
16. Standard of Care. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained
in Instructions given to the Custodian which are not contrary to the
provisions of this Agreement. The Custodian will use reasonable care
with respect to the safekeeping of Property in the Account and,
except as otherwise expressly provided herein, in carrying out its
obligations under this Agreement. So long as and to the extent that
it has exercised reasonable care, the Custodian shall not be
responsible for the title, validity or genuineness of any Property or
other property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless
in acting upon, and may conclusively rely on, without liability for
any loss resulting therefrom, any notice, request, consent,
certificate or other instrument reasonably believed by it to be
genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified
by the Customer for any losses, damages, costs and expenses
(including, without limitation, the fees and expenses of counsel)
incurred by the Custodian and arising out of action taken or omitted
with reasonable care by the Custodian hereunder or under any
Instructions. The Custodian shall be liable to the Customer for any
act or omission to act of any Subcustodian to the same extent as if
the Custodian committed such act itself. With respect to a Securities
System, the Custodian shall only be responsible or liable for losses
arising from employment of such Securities System caused by the
Custodian's own failure to exercise reasonable care. In the event of
any loss to the Customer by reason of the failure of the Custodian or
a Subcustodian to utilize reasonable care, the Custodian shall be
liable to the Customer to the extent of the Customer's actual damages
at the time such loss was discovered without reference to any special
conditions or circumstances. In no event shall the Custodian be
liable for any consequential or special damages. The Custodian shall
be entitled to rely, and may act, on advice of counsel (who may be
counsel for the Customer) on all matters and shall be without
liability for any action reasonably taken or omitted pursuant to such
advice.
<PAGE>
In the event the Customer subscribes to an electronic on-line service
and communications system offered by the Custodian, the Customer
shall be fully responsible for the security of the Customer's
connecting terminal, access thereto and the proper and authorized use
thereof and the initiation and application of continuing effective
safeguards with respect thereto and agree to defend and indemnify the
Custodian and hold the Custodian harmless from and against any and
all losses, damages, costs and expenses (including the fees and
expenses of counsel) incurred by the Custodian as a result of any
improper or unauthorized use of such terminal by the Customer or by
any others.
All collections of funds or other property paid or distributed in
respect of Securities in the Account, including funds involved in
third-party foreign exchange transactions, shall be made at the risk
of the Customer.
Subject to the exercise of reasonable care, the Custodian shall have
no liability for any loss occasioned by delay in the actual receipt
of notice by the Custodian or by a Subcustodian of any payment,
redemption or other transaction regarding Securities in the Account
in respect of which the Custodian has agreed to take action as
provided in Section 3 hereof. The Custodian shall not be liable for
any loss resulting from, or caused by, or resulting from acts of
governmental authorities (whether de jure or de facto), including,
without limitation, nationalization, expropriation, and the
imposition of currency restrictions; devaluations of or fluctuations
in the value of currencies; changes in laws and regulations
applicable to the banking or securities industry; market conditions
that prevent the orderly execution of securities transactions or
affect the value of Property; acts of war, terrorism, insurrection or
revolution; strikes or work stoppages; the inability of a local
clearing and settlement system to settle transactions for reasons
beyond the control of the Custodian; hurricane, cyclone, earthquake,
volcanic eruption, nuclear fusion, fission or radioactivity, or other
acts of God.
The Custodian shall have no liability in respect of any loss, damage
or expense suffered by the Customer, insofar as such loss, damage or
expense arises from the performance of the Custodian's duties
hereunder by reason of the Custodian's reliance upon records that
were maintained for the Customer by entities other than the Custodian
prior to the Custodian's employment under this Agreement.
The provisions of this Section shall survive termination of this
Agreement.
17. Investment Limitations and Legal or Contractual Restrictions or
Regulations. The Custodian shall not be liable to the Customer and
the Customer agrees to indemnify the Custodian and its nominees, for
any loss, damage or expense suffered or incurred by the Custodian or
its nominees arising out of any violation of any investment
restriction or other restriction or limitation applicable to the
Customer pursuant to any contract or any law or regulation. The
provisions of this Section shall survive termination of this
Agreement.
18. Fees and Expenses. The Customer agrees to pay to the Custodian such
compensation for its services pursuant to this Agreement as may be
mutually agreed upon in writing from time to time and the Custodian's
reasonable out-of-pocket or incidental expenses in connection with
the performance of this Agreement, including (but without limitation)
legal fees as described herein and/or deemed necessary in the
judgment of the Custodian to keep safe or protect the Property in the
Account. The initial fee schedule is attached hereto as Exhibit B.
The Customer hereby agrees to hold the Custodian harmless from any
liability or loss resulting from any taxes or other governmental
charges, and any expense related thereto, which may be imposed, or
assessed with respect to any
<PAGE>
Property in the Account and also agrees to hold the Custodian, its
Subcustodians, and their respective nominees harmless from any
liability as a record holder of Property in the Account. The
Custodian is authorized to charge the Account for such items and the
Custodian shall have a lien on the Property in the Account for any
amount payable to the Custodian under this Agreement, including but
not limited to amounts payable pursuant to Section 13 and pursuant to
indemnities granted by the Customer under this Agreement. The
provisions of this Section shall survive the termination of this
Agreement.
19. Tax Reclaims. With respect to withholding taxes deducted and which
may be deducted from any income received from any Property in the
Account, the Custodian shall perform such services with respect
thereto as are described in Exhibit C attached hereto and shall in
connection therewith be subject to the standard of care set forth in
such Exhibit C. Such standard of care shall not be affected by any
other term of this Agreement.
20. Amendment, Modifications, etc. No provision of this Agreement may be
amended, modified or waived except in a writing signed by the parties
hereto. No waiver of any provision hereto shall be deemed a
continuing waiver unless it is so designated. No failure or delay on
the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial
exercise of any power or right preclude any other or further exercise
thereof or the exercise of any other power or right.
21. Termination. This Agreement may be terminated by the Customer or the
Custodian by ninety (90) days' written notice to the other; provided
that notice by the Customer shall specify the names of the persons to
whom the Custodian shall deliver the Securities in the Account and to
whom the Cash in the Account shall be paid. If notice of termination
is given by the Custodian, the Customer shall, within ninety (90)
days following the giving of such notice, deliver to the Custodian a
written notice specifying the names of the persons to whom the
Custodian shall deliver the Securities in the Account and to whom the
Cash in the Account shall be paid. In either case, the Custodian will
deliver such Securities and Cash to the persons so specified, after
deducting therefrom any amounts which the Custodian determines to be
owed to it under Sections 13, 18, and 23. In addition, the Custodian
may in its discretion withhold from such delivery such Cash and
Securities as may be necessary to settle transactions pending at the
time of such delivery. The Customer grants to the Custodian a lien
and right of setoff against the Account and all Property held therein
from time to time in the full amount of the foregoing obligations. If
within ninety (90) days following the giving of a notice of
termination by the Custodian, the Custodian does not receive from the
Customer a written notice specifying the names of the persons to whom
the Custodian shall deliver the Securities in the Account and to whom
the Cash in the Account shall be paid, the Custodian, at its
election, may deliver such Securities and pay such Cash to a bank or
trust company doing business in the State of New York to be held and
disposed of pursuant to the provisions of this Agreement, or may
continue to hold such Securities and Cash until a written notice as
aforesaid is delivered to the Custodian, provided that the
Custodian's obligations shall be limited to safekeeping.
22. Notices. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or
notices in connection herewith (a) shall be in writing, hand
delivered or sent by registered mail, telex or facsimile addressed to
such other address as shall have been furnished by the receiving
party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the
proper number and acknowledged by a proper answerback.
<PAGE>
23. Security for Payment. To secure payment of all obligations due
hereunder, the Customer hereby grants to Custodian a continuing
security interest in and right of setoff against the Account and all
Property held therein from time to time in the full amount of such
obligations. Should the Customer fail to pay promptly any amounts
owed hereunder, Custodian shall be entitled to use available Cash in
the Account, and to dispose of Securities in the Account as is
necessary. In any such case and without limiting the foregoing,
Custodian shall be entitled to take such other action(s) or exercise
such other options, powers and rights as Custodian now or hereafter
has as a secured creditor under the New York Uniform Commercial Code
or any other applicable law.
24. Representations and Warranties.
(a) The Customer hereby represents and warrants to the Custodian
that:
(i) the employment of the Custodian and the allocation of fees,
expenses and other charges to the Account as herein provided, is not
prohibited by law or any governing documents or contracts to which
the Customer is subject;
(ii) the terms of this Agreement do not violate any obligation by
which the Customer is bound, whether arising by contract, operation
of law or otherwise;
(iii) this Agreement has been duly authorized by appropriate action
and when executed and delivered will be binding upon the Customer in
accordance with its terms; and
(iv) it will deliver to the Custodian a duly executed Secretary's
Certificate in the form of Exhibit D attached hereto or such other
evidence of such authorization as the Custodian may reasonably
require, whether by way of a certified resolution or otherwise.
(b) The Custodian hereby represents and warrants to the Customer
that:
(i) the terms of this Agreement do not violate any obligation by
which the Custodian is bound, whether arising by contract, operation
of law or otherwise;
(ii) this Agreement has been duly authorized by appropriate action
and when executed and delivered will be binding upon the Custodian in
accordance with its terms;
(iii) the Custodian will deliver to the Customer such evidence of
such authorization as the Customer may reasonably require, whether by
way of a certified resolution or otherwise; and
(iv) Custodian is qualified as a custodian under Section 26(a) of the
1940 Act and warrants that it will remain so qualified or upon
ceasing to be so qualified shall promptly notify the Customer in
writing.
25. Governing Law and Successors and Assigns. This Agreement shall be
governed by the law of the State of New York and shall not be
assignable by either party, but shall bind the successors in interest
of the Customer and the Custodian.
26. Publicity. Customer shall furnish to Custodian in accordance with
Section 22 above, prior to any distribution thereof, copies of any
material prepared for distribution to any persons who are not parties
hereto that refer in any way to the Custodian. Customer shall not
distribute or permit the
<PAGE>
distribution of such materials if Custodian reasonably objects in
writing within ten (10) business days of receipt thereof (or such
other time as may be mutually agreed) after receipt thereof. The
provisions of this Section shall survive the termination of this
Agreement.
27. Submission to Jurisdiction. Any suit, action or proceeding arising
out of this Agreement may be instituted in any State or Federal court
sitting in the City of New York, State of New York, United States of
America, and the Customer irrevocably submits to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding
and waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of venue of any such
suit, action or proceeding brought in such a court and any claim that
such suit, action or proceeding was brought in an inconvenient forum.
28. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have
been signed and delivered by each of the parties hereto.
29. Confidentiality. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its
business and operations. All confidential information provided by a
party hereto shall be used by any other party hereto solely for the
purpose of rendering services pursuant to this Agreement and, except
as may be required in carrying out this Agreement, shall not be
disclosed to any third party without the prior consent of such
providing party. The foregoing shall not be applicable to any
information that is publicly available when provided or thereafter
becomes publicly available other than through a breach of this
Agreement, or that is required or requested to be disclosed by any
bank or other regulatory examiner of the Custodian, Customer, or any
Subcustodian, any auditor of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
30. Severability. If any provision of this Agreement is determined to be
invalid or unenforceable, such determination shall not affect the
validity or enforceability of any other provision of this Agreement.
31. Headings. The headings of the paragraphs hereof are included for
convenience of reference only and do not form a part of this
Agreement.
ISI STRATEGY FUND, INC.
By: /s/Scott J. Liotta
--------------------------
Name: Scott J. Liotta
--------------------------
Title: Vice President
--------------------------
BANKERS TRUST COMPANY
By: /s/Valdemar Bertelsen III
--------------------------
Name: Valdemar Bertelsen III
--------------------------
Title: Vice President
--------------------------
<PAGE>
EXHIBIT A
To Custodian Agreement dated as of the 11th day of August, 1997
between Bankers Trust Company and ISI Strategy Fund, Inc.
PROXY SERVICE
The following is a description of the Proxy Service referred to in
Section 10 of the above referred to Custodian Agreement. Terms used
herein as defined terms shall have the meanings ascribed to them
therein unless otherwise defined below.
The Custodian provides a service, described below, for the
transmission of corporate communications in connection with
shareholder meetings relating to Securities held in Argentina,
Australia, Austria, Canada, Denmark, Finland, France, Germany,
Greece, Hong Kong, Indonesia, Ireland, Italy, Japan, Korea, Malaysia,
Mexico, Netherlands, New Zealand, Pakistan, Poland, Singapore, South
Africa, Spain, Sri Lanka, Sweden, United Kingdom, United States, and
Venezuela. For the United States and Canada, the term "corporate
communications" means the proxy statements or meeting agenda, proxy
cards, annual reports and any other meeting materials received by the
Custodian. For countries other than the United States and Canada, the
term "corporate communications" means the meeting agenda only and
does not include any meeting circulars, proxy statements or any other
corporate communications furnished by the issuer in connection with
such meeting. Non-meeting related corporate communications are not
included in the transmission service to be provided by the Custodian
except upon request as provided below.
The Custodian's process for transmitting and translating meeting
agendas will be as follows:
1) If the meeting agenda is not provided by the issuer in the English
language, and if the language of such agenda is in the official
language of the country in which the related security is held, the
Custodian will as soon as practicable after receipt of the original
meeting agenda by a Subcustodian provide an English translation
prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished, the
local language agenda will not be furnished unless requested.
Translations will be free translations and neither the Custodian nor
any Subcustodian will be liable or held responsible for the accuracy
thereof or any direct or indirect consequences arising therefrom,
including without limitation arising out of any action taken or
omitted to be taken based thereon.
If requested, the Custodian will, on a reasonable efforts basis,
endeavor to obtain any additional corporate communication such as
annual or interim reports, proxy statements, meeting circulars, or
local language agendas, and provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon
receipt by the Custodian of notice from a Subcustodian, the Custodian
will provide a notice to the Customer
<PAGE>
indicating the deadline for receipt of its instructions to enable the
voting process to take place effectively and efficiently. As voting
procedures will vary from market to market, attention to any required
procedures will be very important. Upon timely receipt of voting
instructions, the Custodian will promptly forward such instructions
to the applicable Subcustodian. If voting instructions are not timely
received, the Custodian shall have no liability or obligation to take
any action.
For Securities held in markets other than those set forth in the
first paragraph, the Custodian will not furnish the material
described above or seek voting instructions. However, if requested to
exercise voting rights at a specific meeting, the Custodian will
endeavor to do so on a reasonable efforts basis without any assurance
that such rights will be so exercised at such meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to
appropriate instructions or direction (e.g., by way of illustration
only and not by way of limitation, physical presence is required at a
meeting and/or travel expenses are incurred), such expenses will be
reimbursed out of the Account unless other arrangements have been
made for such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to
include jurisdictions which are not currently included as set forth
in the second paragraph hereof. The Custodian will notify the
Customer as to the inclusion of additional countries or deletion of
existing countries after their inclusion or deletion and this Exhibit
A will be deemed to be automatically amended to include or delete
such countries as the case may be.
<PAGE>
EXHIBIT B
To Custodian Agreement dated as of 11th day of August, 1997 between
Bankers Trust Company and ISI Strategy Fund, Inc.
CUSTODY FEE SCHEDULE
--------------------
ANNUAL ASSET FEE (BY FUND- EXCEPT CASH RESERVE)
Market Value Basis Point
$0 - $50 million 1.75
$50 million - $100 million 1.50
Over $100 million 1.00
ANNUAL ASSET FEE (CASH RESERVE FUND)
Market Value Basis Point
$0 - $1 billion 1.50
$1 billion - $4 billion 1.00
Over $4 billion 0.70
TRANSACTION FEES
==============================================================================
TRANSACTION TYPE $USD
=========================================== ==================================
AUTOMATED DEPOSITORY: DTC/PTC/FED 10.00
=========================================== ==================================
MANUAL DEPOSITORY: DTC/PTC/ FED 15.00
=========================================== ==================================
PHYSICAL AUTOMATED 15.00
=========================================== ==================================
PHYSICAL MANUAL 20.00
=========================================== ==================================
REPOS 15.00
=========================================== ==================================
P&I PAYMENTS 5.00
=========================================== ==================================
REDEMPTIONS 10.00
=========================================== ==================================
<PAGE>
=========================================== ==================================
REORGANIZATIONS Included in safekeeping charge
=========================================== ==================================
OUTGOING WIRES (USD) 6.00
=========================================== ==================================
INCOMING WIRES (USD) No Charge
=========================================== ==================================
INTERNAL CASH TRANSFERS No Charge
=========================================== ==================================
GLOBAL CUSTODY FEES
COUNTRY Annual Asset Fee Transaction Fees
Canada 2 20
Mexico 5 30
Switzerland 2 50
<PAGE>
NOTES
1 Market Values will be provided by the Fund Accountant at
month-end to determine monthly average assets for billing
purposes
1 A manual transaction is an instruction that is received in
writing, i.e. facsimile
2 Bankers Trust will be responsible for the affirmation of
DTC trades
3 Fees are billed monthly in arrears The standard Global
Custody service includes: asset safekeeping, trade
settlement, income collection, corporate action processing
(including proxy voting) and tax reclaims (where
appropriate refer to policy statements for further
clarification)
4 Third party FX transactions and other cash movements with
no associated security transaction (e.g. free
payments/receipts) are charged at $10 per U.S. wire and
$25 per non U.S. wire. No fee is levied for FX
transactions executed with Bankers Trust.
This Exhibit B shall be amended upon delivery by the Custodian of a new
Exhibit B to the Customer and acceptance thereof by the Customer and shall be
effective as of the date of acceptance by the Customer or a date agreed upon
between the Custodian and the Customer.
<PAGE>
EXHIBIT C
To Custodian Agreement dated as of 11th day of August, 1997 between
Bankers Trust Company and ISI Strategy Fund, Inc..
TAX RECLAIMS
------------
Pursuant to Section 18 of the above referred to Custodian Agreement, the
Custodian shall perform the following services with respect to withholding
taxes imposed or which may be imposed on income from Property in the Account.
Terms used herein as defined terms shall unless otherwise defined have the
meanings ascribed to them in the above referred to Custodian Agreement.
When withholding tax has been deducted with respect to income from any
Property in an Account, the Custodian will actively pursue on a reasonable
efforts basis the reclaim process, provided that the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by the
Custodian or its designee. In all cases of withholding, the Custodian will
provide full details to the Customer. If exemption from withholding at the
source can be obtained in the future, the Custodian will notify the Customer
and advise what documentation, if any, is required to obtain the exemption.
Upon receipt of such documentation from the Customer, the Custodian will file
for exemption on the Customer's behalf and notify the Customer when it has
been obtained.
In connection with providing the foregoing service, the Custodian shall be
entitled to apply categorical treatment of the Customer according to the
Customer's nationality, the particulars of its organization and other relevant
details that shall be supplied by the Customer. It shall be the duty of the
Customer to inform the Custodian of any change in the organization, domicile
or other relevant fact concerning tax treatment of the Customer and further to
inform the Custodian if the Customer is or becomes the beneficiary of any
special ruling or treatment not applicable to the general nationality and
category or entity of which the Customer is a part under general laws and
treaty provisions. The Custodian may rely on any such information provided by
the Customer.
In connection with providing the foregoing service, the Custodian may also
rely on professional tax services published by a major international
accounting firm and/or advice received from a Subcustodian in the
jurisdictions in question. In addition, the Custodian may seek the advice of
counsel or other professional tax advisers in such jurisdictions. The
Custodian is entitled to rely, and may act, on information set forth in such
services and on advice received from a Subcustodian, counsel or other
professional tax advisers and shall be without liability to the Customer for
any action reasonably taken or omitted pursuant to information contained in
such services or such advice.
- -
<PAGE>
EXHIBIT D
ISI STRATEGY FUND, INC.
Certificate of the Secretary
----------------------------
I, __________[Name of Secretary], hereby certify that I am the
Secretary of ISI STRATEGY FUND, INC. a ______________________[type of entity]
organized under the laws of ________________________[jurisdiction] (the
"Customer"), and as such I am duly authorized to, and do hereby, certify that:
1. Good Standing. The Customer's organizational documents,
and all amendments thereto, have been filed with the appropriate governmental
officials of _____________________[jurisdiction], the Customer continues to be
in existence and is in good standing, and no action has been taken to repeal
such organizational documents, the same being in full force and effect on the
date hereof.
2. Organizational Documents. The Customer's [name of
organizational documents -i.e., Bylaws, Articles of Incorporation, etc.] have
been duly adopted and no action has been taken to repeal such [name of
organizational documents], the same being in full force and effect.
3. Resolutions. Resolutions have been duly adopted on behalf
of the Customer, which resolutions (i) have not in any way been revoked or
rescinded, (ii) have been in full force and effect since their adoption, to
and including the date hereof, and are now in full force and effect, and (iii)
are the only corporate proceedings of the Customer now in force relating to or
affecting the matters referred to therein, including, without limitation,
confirming that the Customer is duly authorized to appoint Bankers Trust
Company as Custodian of assets delivered to it by the Customer and enter into
a certain custody agreement with Bankers Trust Company (the "Agreement")
setting forth the terms and conditions of such appointment, and that certain
designated officers, including those identified in paragraph 4 of this
Certificate, are authorized to (a) execute said Agreement in such form as the
officers executing the same have approved, such approval to be conclusively
evidenced by their execution and delivery thereof, and (b) execute any
instructions in connection with the Agreement, in conformity with the
requirements of the Customer's [name of organizational documents], and other
pertinent documents to which the Customer may be bound.
4. Incumbency. The following named individuals are duly
elected (or appointed), qualified and acting officers of the Customer holding
those offices set forth opposite their respective names as of the date hereof,
each having full authority, acting individually, to bind the Customer, as a
legal matter, with respect to all matters pertaining to the Agreement, and to
execute and deliver said Agreement on behalf of the Customer, and the
signatures set forth opposite the respective names and titles of said officers
are their true, authentic signatures:
Name Title Signature
- -------------------- -------------------- --------------------
- -------------------- -------------------- --------------------
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this 11th
day of August, 1997.
By: __________________________________
Name: __________________________________
Title: Secretary
I, __________________________[Name of Confirming Officer],
__________________[Title] of the Customer, hereby certify that on this ___ day
of _______________[Date], 19__, _____________________[NAME OF SECRETARY] is
the duly elected Secretary of the Customer and that the signature above is
his/her genuine signature.
By:_________________________________
Name:_______________________________
Title:________________________________
- -
<PAGE>
EXHIBIT E
CASH MANAGEMENT ADDENDUM (this "Addendum") to the CUSTODIAN
AGREEMENT (the "Agreement") between BANKERS TRUST COMPANY (the "Custodian")
and ISI STRATEGY FUND, INC. (the "Customer").
WHEREAS, the Custodian will provide cash management services
to the Customer, and the Custodian and the Customer desire to confirm their
understanding with respect to such services;
NOW, THEREFORE, the Custodian and the Customer agree as
follows:
1. Until the Custodian receives Instructions to the
contrary, the Custodian will hold all Cash received for the Account in deposit
accounts maintained with Subcustodians for the benefit of the Custodian's
clients, will credit to the Account interest on such Cash at rates and times
the Custodian shall from time to time determine and will receive compensation
therefor out of any amounts paid by Subcustodians in respect of such Cash.
2. To the extent the Custodian may from time to time inform
the Customer with respect to one or more currencies, the Custodian will sweep
Cash in such currencies to deposit accounts maintained with one or more
Subcustodians until the Custodian notifies the Customer otherwise or receives
Instructions to the contrary.
3. The Customer acknowledges that it has received and
reviewed the current policies of the Custodian regarding cash management
services, which are attached to this Addendum.
4. Capitalized terms used but not defined in this Addendum
are used with the respective meanings assigned to them in the Agreement.
IN WITNESS WHEREOF, this Addendum has been executed as of
the date of the Agreement.
BANKERS TRUST COMPANY
By:/s/Valdemar Bertelsen III
----------------------------
Name: Valdemar Bertelsen III
----------------------------
Title: Vice President
----------------------------
ISI STRATEGY FUND, INC.
By: /s/Scott J. Liotta
----------------------------
Name: Scott J. Liotta
----------------------------
Title: Vice President
----------------------------
<PAGE>
Cash Management Program -- Global Custody
Bankers Trust Company ("BT" or "we") currently pays interest on uninvested
cash balances in the currencies listed below. For each of those currencies,
the interest rate we pay is based on the rate paid by our London branch or the
local subcustodian on overnight deposits in the currency. In either case,
interest is calculated by using a weekly or monthly average of the overnight
rate and subtracting a spread. The current spreads are listed beside each
currency below.
Currencies Rates
---------- -----
Austrian Schilling* Base Rate less 250 basis points
British Pound Sterling* Base Rate less 250 basis points
Deutsche Mark* Base Rate less 250 basis points
Dutch Guilder* Base Rate less 250 basis points
French Franc* Base Rate less 250 basis points
U.S. Dollar* Base Rate less 250 basis points
Argentine Peso Base Rate less 150 basis points
Australian Dollar* Base Rate less 250 basis points
Belgian Franc* Base Rate less 250 basis points
Canadian Dollar* Base Rate less 250 basis points
Czech Koruna Base Rate less 150 basis points
Danish Krone* Base Rate less 250 basis points
European Currency Unit* Base Rate less 250 basis points
Finnish Markka* Base Rate less 250 basis points
Greek Drachma Base Rate less 150 basis points
Hong Kong Dollar* Base Rate less 250 basis points
Hungarian Forint Base Rate less 150 basis points
Indonesian Rupiah Base Rate less 150 basis points
Irish Punt* Base Rate less 250 basis points
Israeli Shekel Base Rate less 150 basis points
Italian Lira* Base Rate less 250 basis points
Japanese Yen Base Rate less 150 basis points
Korean Won Base Rate less 150 basis points
Malaysian Ringgit Base Rate less 150 basis points
New Taiwan Dollar Base Rate less 150 basis points
New Zealand Dollar* Base Rate less 250 basis points
Norwegian Krone Base Rate less 150 basis points
Philippine Peso Base Rate less 150 basis points
Polish Zloty Base Rate less 150 basis points
Portuguese Escudo* Base Rate less 250 basis points
Singapore Dollar Base Rate less 150 basis points
Slovak Koruna Base Rate less 150 basis points
South African Rand* Base Rate less 250 basis points
Spanish Peseta* Base Rate less 250 basis points
Swedish Krona* Base Rate less 250 basis points
Swiss Franc* Base Rate less 250 basis points
Thai Baht Base Rate less 150 basis points
- -
<PAGE>
Turkish Lira Base Rate less 150 basis points
- -----------------------
*
Denotes currencies that are part of BT's overnight sweep program.
Operationally, most balances in these currencies are swept overnight
into deposits at BT's London branch.
BT reserves the right, in its sole discretion, to adjust the spread charged on
these currencies at any time and for any reason. In most situations, we will
notify you beforehand (generally by Global Custody Flash Notice and in
writing), unless the adjustment is temporary or due to certain conditions
beyond our control. Such conditions may include any or all of the following:
account balance volatility, interest rate and foreign exchange volatility,
market volatility or other applicable conditions affecting accounts or
currencies generally or any specific account or currency in particular. In the
aforementioned circumstance, we will notify you promptly after the change in
spreads.
For each currency on which we pay interest:
o You will earn interest at the calculated rate on your entire
contractual balance without any action on your part and without any
minimum balance requirements. This is the case regardless of whether
we are able to invest your balances at or near the applicable base
rate and regardless of whether your contractual balance may exceed
your actual balance.
o The minimum rate paid will continue to be 0.50%, except for the
Japanese Yen and the Singapore Dollar. (This is also subject to
change as appropriate for any currency.)
o You will have continuous access through Globe*View, BTWorld, or
Globe*Link to the interest rate earned during the previous "rate
averaging period". Because we use weekly or monthly average rates to
calculate the interest you earn, we do not know the actual interest
rate until the weekly or monthly period is completed.
o For swept currencies, from time to time we may not be able to sweep
the full amount of your balances to our London branch because of
operational constraints or because your balance on a contractual
basis temporarily exceeds your actual balance. You will, however,
always receive credit for interest based on your entire contractual
balance. To the extent you would have earned a lower rate on balances
not swept, we will make up the difference. To the extent that actual
balances are higher than contractually posted balances due to
purchase fails, Bankers Trust Company will retain the interest earned
as compensation.
o The effective rate we pay on overnight balances will generally differ
from the effective rate we receive (whether from our London branch or
the local subcustodian). Any difference between the rate we receive
and the rate we pay (which may be positive or negative, but is
generally positive) is kept by us and covers our fee for running the
cash management program and the related costs we absorb.
Although currently most cash balances in our overnight sweep program are swept
into deposits at our London branch, Bankers Trust Company reserves the right
to utilize other branches or affiliates for its overnight sweep program.
As a reminder, overdrafts are not permitted in the normal course of business
in any currency. Should they occur, we will charge your account a penalty rate
of interest.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
ISI Strategy Fund, Inc.
We consent to the use in Post-Effective Amendment No. 2 to the
Registration Statement of ISI Strategy Fund, Inc. (Registration No. 333-31127)
of our report dated June 26, 1998 appearing in the Statement of Additional
Information, which is a part of such Registration Statement, and to the
references to us under the caption "Financial Highlights" appearing in the
Prospectus which also is a part of such Registration Statement.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
Princeton, New Jersey
July 31, 1998
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<PAGE>
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