As filed with the Securities and Exchange Commission on February 28, 1997
FILE NO. 811-8996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
INTERNATIONAL EQUITY PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
Butterfield House, 4th Floor, Fort Street, P.O. Box 2330, George Town, Grand
Cayman, Cayman Islands, BWI
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (809) 949-4719
Philip W. Coolidge, 6 St. James Avenue, Boston, Massachusetts 02116
(Name and Address of Agent for Service)
Copy to: John E. Baumgardner, Esq.
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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WS5313A
EXPLANATORY NOTE
This Amendment to the Registration Statement on Form N1-A (the
"Registration Statement") has been filed by the Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, beneficial
interests in the Registrant are not being registered under the Securities Act of
1933 (the "1933 Act") because such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under the 1933 Act.
This Registration Statement does not constitute an offer to sell, or the
solicitation of an offer to buy, any beneficial interests in the Registrant.
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WS5313A
PART A
Responses to Items 1 through 3 and 5A have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
International Equity Portfolio (the "Portfolio") is a non-diversified
open-end investment company which was organized as a trust under the laws of the
State of New York on August 15, 1994. Beneficial interests in the Portfolio are
issued solely in private placement transactions that do not involve any "public
offering" within the meaning of Section 4(2) of the Securities Act of 1933, as
amended (the "1933 Act"). Investments in the Portfolio may only be made by other
investment companies, insurance company separate accounts, common or commingled
trust funds or similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This Registration
Statement does not constitute an offer to sell, or the solicitation of an offer
to buy, any "security" within the meaning of the 1933 Act.
The Portfolio is advised by Brown Brothers Harriman & Co. (the
"Investment Adviser").
Investments in the Portfolio are neither insured nor guaranteed by the
U.S. Government. Interests in the Portfolio are not deposits or obligations of,
or guaranteed by, Brown Brothers Harriman & Co. or any other bank, and the
interests are not insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other federal, state or other governmental agency.
An investment in the Portfolio is subject to investment risk, including possible
loss of principal amount invested.
Part B contains more detailed information about the Portfolio,
including information related to (i) the investment policies and restrictions of
the Portfolio, (ii) the Trustees, officers, Investment Adviser and administrator
of the Portfolio, (iii) portfolio transactions, (iv) rights and liabilities of
investors, and (v) the audited financial statements of the Portfolio at October
31, 1996.
The investment objective of the Portfolio is described below, together
with the policies employed to attempt to achieve this objective. Additional
information about the investment policies of the Portfolio appears in Part B
under Item 13.
The investment objective of the Portfolio is to provide investors with
long-term maximization of total return, primarily through capital appreciation.
There can be no assurance that the Portfolio's investment objective will be
achieved.
The investment objective of the Portfolio is a fundamental policy and
may be changed only with the approval of the holders of a "majority of the
outstanding voting securities" as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), of the Portfolio. As used in this Part A, the term
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"majority of the outstanding voting securities as defined in the 1940 Act" means
the vote of (i) 67% or more of the voting securities present at a meeting, if
the holders of more than 50% of the outstanding voting securities are present in
person or represented by proxy; or (ii) more than 50% of the outstanding voting
securities, whichever is less. Except as indicated, the investment policies as
described below are not fundamental and may be changed without such approval.
The assets of the Portfolio under normal circumstances are fully
invested in equity securities of companies based outside the United States and
Canada in the markets of Japan, United Kingdom, Germany, France, Hong Kong,
Switzerland, Malaysia, South Africa, Australia, Mexico, Taiwan, Netherlands,
South Korea, Italy, Singapore, Thailand, Spain and Sweden. The Portfolio may
also invest in the smaller markets of Brazil, India, Belgium, Israel, Chile,
Argentina, Denmark, China, Philippines, Turkey, Indonesia, Austria, Norway, New
Zealand, Finland, Ireland, Portugal, Greece, Pakistan, Czech Republic, Colombia,
Venezuela, Peru, Jordan, Egypt, Poland, Morocco, Sri Lanka, Zimbabwe, Kenya,
Nigeria, Tunisia, Hungary, Slovenia, Bangladesh, Botswana, and Ghana, although
no more than 20% of the Portfolio's assets will be invested in these smaller
capitalization markets. In addition, no more than 5% of the Portfolio will be
invested in any one smaller market. The following table is a comparison of
Market Capitalization, Gross Domestic Product (GDP) and Population of the major
countries in which the Portfolio invests.
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INTERNATIONAL STATISTICS
<TABLE>
<CAPTION>
MARKET GROSS DOMESTIC
CAPITALIZATION PRODUCT POPULATION
DOLLARS % OF DOLLARS % OF % OF
(BILLIONS) TOTAL (BILLIONS) TOTAL (MILLIONS) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Japan 2,663 25.5 4,149 23.2 125.2 3.0
United Kingdom 1,590 15.2 1,200 6.7 58.3 1.4
Germany 667 6.4 2,241 12.5 81.6 1.9
France 540 5.2 1,473 8.2 58.0 1.4
Hong Kong 449 4.3 143 0.8 6.3 0.1
Switzerland 399 3.8 268 1.5 7.0 0.2
Malaysia 282 2.7 84 0.5 20.1 0.5
South Africa 230 2.2 90 0.5 41.2 1.0
Australia 266 2.5 374 2.1 18.1 0.4
Mexico 110 1.1 279 1.6 90.5 2.1
Taiwan 312 3.0 261 1.5 21.3 0.5
Netherlands 426 4.1 365 2.0 15.4 0.4
Korea 139 1.3 416 2.3 44.9 1.1
Italy 254 2.4 1,072 6.0 57.2 1.4
Singapore 256 2.5 86 0.5 3.0 0.1
Thailand 96 0.9 162 0.9 59.4 1.4
Spain 181 1.7 538 3.0 39.2 0.9
Sweden 222 2.1 237 1.3 8.8 0.2
Brazil 219 2.1 721 4.0 155.8 3.7
India 125 1.2 264 1.5 935.7 22.1
Belgium 117 1.1 247 1.4 10.1 0.2
Israel 36 0.3 87 0.5 57.2 1.4
Chile 72 0.7 67 0.4 14.2 0.3
Argentina 44 0.4 286 1.6 34.8 0.8
Denmark 66 0.6 164 0.9 5.2 0.1
China 5 0.0 702 3.9 1211.5 28.6
Philippines 57 0.5 73 0.4 70.3 1.7
Turkey 35 0.3 165 0.9 61.6 1.5
Indonesia 91 0.9 192 1.1 193.8 4.6
Austria 35 0.3 216 1.2 8.5 0.2
Norway 53 0.5 144 0.8 4.4 0.1
New Zealand 36 0.3 64 0.4 3.5 0.1
Finland 62 0.6 118 0.7 5.1 0.1
Ireland 31 0.3 64 0.4 3.6 0.1
Portugal 31 0.3 89 0.5 9.9 0.2
Greece 24 0.2 108 0.6 10.5 0.2
Pakistan 85 0.8 47 0.3 129.8 3.1
Czech Republic 20 0.2 46 0.3 10.3 0.2
Colombia 17 0.2 79 0.4 35.1 0.8
Venezuela 18 0.2 51 0.3 21.6 0.5
Peru 14 0.1 59 0.3 23.5 0.6
Jordan 5 0.0 6 0.0 5.4 0.1
Egypt 12 0.1 57 0.3 59.0 1.4
Poland 8 0.1 121 0.7 38.6 0.9
Morocco 8 0.1 33 0.2 27.1 0.6
Sri Lanka 2 0.0 12 0.1 18.4 0.4
Zimbabwe 4 0.0 6 0.0 11.5 0.3
Kenya 2 0.0 8 0.0 30.5 0.7
Nigeria 2 0.0 42 0.2 111.7 2.6
Tunisia 4 0.0 18 0.1 8.9 0.2
Luxembourg 6 0.1 17 0.1 0.4 0.0
Hungary 5 0.0 45 0.2 10.2 0.2
Slovenia 0.5 0.0 14 0.1 2.0 0.0
Bangladesh 2 0.0 28 0.2 120.4 2.8
Botswana 0.3 0.0 4 0.0 1.5 0.0
Ghana 1 0.0 6 0.0 17.5 0.4
TOTAL 10,436 100.0 17,910 100.0 4234.6 100.0
</TABLE>
Sources:
Market Capitalization: Datastream (as of December 1996)
GDP/Population: International Monetary Fund: International Financial Statistics
(February 1997). International Finance Corporation: Emerging Stock Markets
Factbook (1996).
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In constructing the Portfolio, emphasis is placed on the equity securities
of companies with strong fundamentals such as leading industry position,
effective management, competitive products and services, high or improving
return on investment and a sound financial structure. Selection of individual
equities is the product of a disciplined process which systematically evaluates
growth expectations relative to price levels.
The Investment Adviser, during normal market conditions, intends to broadly
diversify the Portfolio among emerging markets with no more than 15% of the
assets of the Portfolio in any single market. The Investment Adviser allocates
investment among various countries based upon the economic environment,
liquidity conditions, valuation levels, expected earnings growth, government
policies and political stability. As a result, the Portfolio's assets are
allocated among countries in a manner which does not reflect the relative size
or valuation of the country's capital market or a country's relative gross
domestic product ("GDP") or population.
Although the assets of the Portfolio are expected to be invested
primarily in common stocks, other securities with equity characteristics may be
purchased, including securities convertible into common stock, trust or limited
partnership interests, rights and warrants. These equity securities may be
purchased directly or in the form of American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") or other similar securities representing
securities of foreign-based companies. Although the Portfolio invests primarily
in equity securities which are traded on foreign or domestic securities
exchanges, equity securities which are traded in foreign or domestic
over-the-counter markets may be purchased for the Portfolio. (See "Investment
Restrictions".)
The Investment Adviser uses the investment research and economic
studies made available to it by leading banks and brokers around the world, as
well as the analysis and judgment of the investment professionals in its New
York, Tokyo and London offices, to allocate the assets of the Portfolio among
the countries in which the Portfolio may invest and to identify market sectors,
industries and companies with favorable prospects.
Criteria for determining the appropriate allocation of investments
among various countries focus on liquidity conditions, valuation levels,
earnings growth potential, and technical factors. Included among these criteria
are the more traditional analyses of relative economic growth, expected levels
of inflation, currency prospects and government policies. In response to changes
or anticipated changes in these criteria, a particular country's representation
in the Portfolio is increased, decreased or eliminated. As a result of applying
these criteria the Portfolio's assets are allocated among countries in a manner
which does not reflect the relative size or valuation of a country's capital
market or a country's relative GDP or population.
In constructing the portfolio of securities of the Portfolio, emphasis
is placed on the equity securities of larger companies with strong longer term
fundamentals such as leading industry position, effective management,
competitive products and services, high or improving return on investment and a
sound financial structure. Selection of individual equities is the product of a
disciplined process which systematically evaluates growth expectations relative
to price levels.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because securities denominated
in currencies other than the U.S. dollar are bought and sold for the Portfolio,
and interest, dividends and sale proceeds are received by the Portfolio in
currencies other than the U.S. dollar, foreign currency exchange transactions
from time to time are entered into for this Portfolio to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar.
These transactions are agreements to exchange currencies at a specific
rate either for settlement two days thereafter (I.E., spot market or spot
contracts) or for settlement on a future date (I.E., forward contracts). Forward
contracts may be entered into only in an attempt to protect against possible
changes in foreign currency exchange rates that would adversely affect a
portfolio position or an anticipated portfolio position. At any time the effect
of future changes in the foreign exchange rate arising from an outstanding
forward contract can be offset by entering into an offsetting forward contract
expiring on the same date.
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These foreign exchange contracts are made with currency dealers,
usually large commercial banks and financial institutions. Although foreign
exchange rates are volatile, foreign exchange markets are generally liquid with
the equivalent of approximately $500 billion traded worldwide on a
typical day. Spot contracts and forward contracts generally have no deposit
requirements and are traded at a net price without commission.
Since consideration of the prospect for currency parities are
incorporated into the Investment Adviser's long-term investment decisions,
foreign currency hedging transactions with respect to portfolio security
positions are not routinely entered into for the Portfolio. However, the
Investment Adviser believes that it is important to have the flexibility to
enter into foreign currency hedging transactions when it determines that the
transactions would be in the Portfolio's best interest, including the closing
out or offsetting of an existing position.
Although these transactions may reduce the risk of loss due to a
decline in the value of the hedged currency, they also tend to limit the
potential for gain. The precise matching of the forward contract amounts and the
value of the securities involved is not generally possible because the future
value of such securities in foreign currencies changes as a consequence of
market movements in the value of such securities between the date the forward
contract is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly unlikely.
Neither spot nor forward foreign exchange contracts eliminate
fluctuations in the prices of the Portfolio securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
RISK FACTORS. Investing in equity securities of foreign-based companies
involves risks not typically associated with investing in equity securities of
companies organized and operated in the United States. The value of the
investments of the Portfolio may be adversely affected by changes in political
or social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or tax regulations. Many foreign
countries have less political, social and economic stability than the United
States. Some countries may not have fully developed legal structures governing
private or foreign investments or allowing for judicial redress for injuries to
private property. There may also be foreign government regulations and laws
which restrict the amounts and types of foreign investments.
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Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, and the Portfolio holds various foreign
currencies from time to time, the value of the net assets of the Portfolio as
measured in U.S. dollars is affected favorably or unfavorably by changes in
exchange rates. The Portfolio also incurs costs in connection with conversion
between various currencies.
In general, less information is publicly available with respect to
foreign- based companies than is available with respect to U.S. companies. Most
foreign- based companies are also not subject to the uniform accounting and
financial reporting requirements applicable to companies based in the United
States.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of the New York Stock Exchange. Accordingly, the investments of the
Portfolio are less liquid and their prices are more volatile than comparable
investments in securities of U.S. companies. Moreover, the settlement periods
for foreign securities, which are often longer than those for securities of U.S.
companies, may affect portfolio liquidity. In buying and selling securities on
foreign exchanges, fixed commissions are often paid that are generally higher
than the negotiated commissions charged in the United States. In addition, there
is generally less government supervision and regulation of securities exchanges,
brokers and companies in foreign countries than in the United States.
The Portfolio may invest a substantial portion of its assets in the
securities of issuers based in developing countries. These investments may be
subject to potentially greater risks than those of other foreign issuers. These
risks include: (i) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (ii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iii) foreign taxation; (iv)
the absence, until recently, of a capital market structure or market oriented
economy as well as issuers without a long period of successful operations; and
(v) the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events in such countries or their
neighboring countries.
Investments in such countries may involve risks of nationalization,
expropriation and confiscatory taxation. The governments of some of these
countries expropriated large amounts of private property in the past, in many
cases without adequate compensation, and there may be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
the Portfolio could lose a substantial portion of any investments it has made in
the affected countries. Further, less well developed accounting standards exist
in some of these countries. Finally, even though currencies may be currently
convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to the Portfolio's shareholders.
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HEDGING STRATEGIES
Subject to applicable laws and regulations and solely as a hedge
against changes in the market value of portfolio securities or securities
intended to be purchased, put and call options on stock indexes may be purchased
for the Portfolio. (See Appendix on page A-17 for more detail.) Put and call
options on currency may also be purchased for the Portfolio for the sole purpose
of reducing risk.
For the same purpose, put and call options on stocks may be purchased
and futures contracts on stock indexes may be entered into for the Portfolio,
although in each case the current intention is not to do so in such a manner
that more than 5% of the Portfolio's net assets would be at risk.
Put and call option contracts may be purchased for the Portfolio only
to the extent permitted by the policies of state securities authorities in
states in which shares of the Portfolio are qualified for offer and sale.
Over-the-counter options ("OTC Options") purchased are treated as not readily
marketable.
(See "Investment Restrictions".)
PORTFOLIO BROKERAGE
The Portfolio is managed actively in pursuit of its investment
objective. Securities are not traded for short-term profits but, when
circumstances warrant, securities are sold without regard to the length of time
held. A 100% annual turnover rate would occur, for example, if all portfolio
securities (excluding short-term obligations) were replaced once in a period of
one year. For the period from April 1, 1995 (commencement of operations) to
October 31, 1995 the portfolio turnover rate of the Portfolio was 23%. For the
fiscal year ended October 31, 1996, the portfolio turnover rate of the Portfolio
was 36%. The amount of brokerage commissions and taxes on realized capital gains
to be borne by the investors tend to increase as the level of portfolio activity
increases.
In effecting securities transactions the Investment Adviser seeks to
obtain the best price and execution of orders. All of the transactions for the
Portfolio are executed through qualified brokers. In selecting such brokers, the
Investment Adviser considers the quality and reliability of brokerage services,
including: the broker's ability to execute orders without disturbing the market
price; the broker's reliability for prompt, accurate confirmations and on-time
delivery of securities; the broker's performance and financial condition and
responsibility; the research and other investment information provided by the
broker; and the commissions charged. Accordingly, the commissions charged by any
such broker may be greater than the amount another firm might charge if the
Investment Adviser determines in good faith that the amount of such commissions
is reasonable in relation to the value of the brokerage services and research
information provided by such broker.
The Investment Adviser may direct a portion of the Portfolio's
securities transactions to certain unaffiliated brokers which in turn use a
portion of the commissions they receive from the Portfolio to pay other
unaffiliated service providers on behalf of the Portfolio for services provided
for which the Portfolio would otherwise be obligated to pay. Such commissions
paid by the Portfolio are at the same rate paid to other brokers for effecting
similar transactions in listed equity securities.
All of the transactions for the Portfolio are executed through
qualified brokers other than Brown Brothers Harriman & Co. In selecting such
brokers, the Investment Adviser considers the quality and reliability of
brokerage services, including execution capability and performance and financial
responsibility, and may consider the research and other investment information
provided by such brokers. Accordingly, the commissions charged by any such
broker may be greater than the amount another firm might charge if the
Investment Adviser determines in good faith that the amount of such commissions
is reasonable in relation to the value of the brokerage services and research
information provided by such broker.
On those occasions when Brown Brothers Harriman & Co. deems the
purchase or sale of a security to be in the best interests of the Portfolio as
well as other customers, Brown Brothers Harriman & Co., to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including lower
brokerage commissions, if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
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transaction are made by Brown Brothers Harriman & Co. in the manner it considers
to be most equitable and consistent with its fiduciary obligations to its
customers, including the Portfolio. In some instances, this procedure might
adversely affect the Portfolio.
OTHER INVESTMENT TECHNIQUES
SHORT-TERM INSTRUMENTS. The assets of the Portfolio may be invested in
non-U.S. dollar denominated and U.S. dollar denominated short-term instruments,
including U.S. dollar denominated repurchase agreements. Cash is held for the
Portfolio in demand deposit accounts with the Portfolio's custodian bank.
RESTRICTED SECURITIES. Securities that have legal or contractual
restrictions on their resale may be acquired for the Portfolio. The price paid
for these securities, or received upon resale, may be lower than the price paid
or received for similar securities with a more liquid market. Accordingly, the
valuation of these securities reflects any limitation on their liquidity. (See
"Investment Restrictions".)
LOANS OF PORTFOLIO SECURITIES. Loans of portfolio securities up to 30%
of the total value of the Portfolio are permitted. These loans must be secured
continuously by cash or equivalent collateral or by an irrevocable letter of
credit in favor of the Portfolio at least equal at all times to 100% of the
market value of the securities loaned plus accrued income. By lending
securities, the Portfolio's income can be increased by its continuing to receive
income on the loaned securities as well as by the opportunity to receive
interest on the collateral. Any appreciation or depreciation in the market price
of the borrowed securities which occurs during the term of the loan inures to
the Portfolio and its investors.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Securities may be
purchased for the Portfolio on a when-issued or delayed delivery basis. For
example, delivery and payment may take place a month or more after the date of
the transaction. The purchase price and the interest rate payable on the
securities, if any, are fixed on the transaction date. The securities so
purchased are subject to market fluctuation and no income accrues to the
Portfolio until delivery and payment take place. At the time the commitment to
purchase securities on a when-issued or delayed delivery basis is made, the
transaction is recorded and thereafter the value of such securities is reflected
each day in determining the Portfolio's net asset value. The Portfolio maintains
with the Custodian a separate account with a segregated portfolio of securities
in an amount at least equal to these commitments. At the time of its
acquisition, a when-issued or delayed delivery security may be valued at less
than the purchase price. Commitments for such when-issued or delayed delivery
securities are made only when there is an intention of actually acquiring the
securities. On delivery dates for such transactions, such obligations are met
from maturities or sales of securities and/or from cash flow. If the right to
acquire a when- issued or delayed delivery security is disposed of prior to its
acquisition, the Portfolio could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. When-issued or
delayed delivery commitments for the Portfolio may not be entered into if such
commitments exceed in the aggregate 15% of the market value of its total assets,
less liabilities other than the obligations created by when-issued or delayed
delivery commitments.
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INVESTMENT COMPANY SECURITIES. Subject to applicable statutory and
regulatory limitations, the assets of the Portfolio may be invested in shares of
other investment companies. Under the 1940 Act, assets of the Portfolio may be
invested in shares of other investment companies in connection with a merger,
consolidation, acquisition or reorganization or if immediately after such
investment (i) 10% or less of the market value of the Portfolio's total assets
would be so invested, (ii) 5% or less of the market value of the Portfolio's
total assets would be invested in the shares of any one such company, and (iii)
3% or less of the total outstanding voting stock of any other investment company
would be owned by the Portfolio. As a shareholder of another investment company,
the Portfolio would bear, along with other shareholders, its pro rata portion of
the other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that the Portfolio bears
directly in connection with its own operations.
INVESTMENT RESTRICTIONS
Part B of this Registration Statement includes a listing of the
specific investment restrictions which govern the investment policies of the
Portfolio. Certain of these investment restrictions are deemed fundamental
policies and may be changed only with the approval of the holders of a "majority
of the outstanding voting securities as defined in the 1940 Act" of the
Portfolio, including a restriction that not more than 10% of the net assets of
the Portfolio may be invested in securities that are subject to legal or
contractual restrictions on resale.
As a non-fundamental policy, money is not borrowed by the Portfolio in
an amount in excess of 10% of its assets. It is intended that money will be
borrowed only from banks and only either to accommodate requests for the
withdrawal of part or all of an interest while effecting an orderly liquidation
of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations. Securities are not purchased for the Portfolio at any time
at which the amount of its borrowings exceed 5% of its assets.
Also as a non-fundamental policy, at least 65% of the value of the
total assets of the Portfolio is invested in equity securities of companies
based in countries in which it may invest. For these purposes, equity securities
are defined as common stock, securities convertible into common stock,
corporation or limited partnership interests, rights and warrants, and includes
securities purchased directly and in the form of American Depository Receipts,
European Depository Receipts or other similar securities representing common
stock of foreign-based companies.
In accordance with applicable regulations, the Portfolio does not
purchase any restricted security, OTC option, repurchase agreement maturing in
more than seven days, security of a foreign issuer which is not listed on a
recognized domestic or foreign securities exchange, security of a company which,
including predecessors, has a record of less than three years of operations, or
other security that is not readily marketable, if after such purchase more than
10% of the Portfolio's net assets would be represented by such investments.
The Portfolio is classified as "non-diversified" under the 1940 Act,
which means that it is not limited by the 1940 Act with respect to the
proportion of its assets which may be invested in securities of a single
company. However, the proportion of the assets of the Portfolio which may be
invested in securities of
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a single company is limited by the provisions of the Internal Revenue Code of
1986, as amended, so that the Portfolio is not liable for federal income taxes.
As a result, at the end of each quarter of the Portfolio's fiscal year, in
general (i) not more than 25% of the value of the Portfolio's assets is invested
in the securities of any one company, and (ii) at least 50% of the market value
of the Portfolio's assets is represented by cash and securities limited in
respect of any one company to an amount not greater than 5% of the Portfolio's
assets and 10% of the outstanding voting securities of such company. The
possible assumption of large positions in the securities of a small number of
companies may cause the performance of each of the Portfolio to fluctuate to a
greater extent than that of a diversified investment company as a result of
changes in the financial condition or in the market's assessment of the
companies.
For a more detailed discussion of the above investment restrictions, as
well as a description of certain other investment restrictions, see Item 13 in
Part B.
ITEM 5. MANAGEMENT OF THE FUND.
The Portfolio's Trustees, in addition to supervising the actions of the
Investment Adviser and the Portfolio's administrator (the "Administrator"), as
set forth below, decide upon matters of general policy with respect to the
Portfolio.
TRUSTEES
The Trustees of the Portfolio are:
H.B. Alvord
RETIRED, FORMER TREASURER AND TAX COLLECTOR OF LOS ANGELES COUNTY
Richard L. Carpenter
DIRECTOR OF INTERNAL INVESTMENTS OF THE PUBLIC SCHOOL EMPLOYEES'
RETIREMENT SYSTEM
Clifford A. Clark
RETIRED, FORMER SENIOR MANAGER OF BROWN BROTHERS HARRIMAN & CO.
David M. Seitzman
PRACTICING PHYSICIAN WITH SEITZMAN, SHUMAN, KWART AND PHILLIPS
OFFICERS
Because of the services rendered to the Portfolio by the Investment
Adviser and the Administrator, the Portfolio requires no employees, and its
officers, other than the Chairman, receive no compensation from the Portfolio.
(See "Management of the Fund" in Part B.)
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INVESTMENT ADVISER
The Investment Adviser is Brown Brothers Harriman & Co., Private
Bankers, a New York limited partnership established in 1818. The firm is subject
to examination and regulation by the Superintendent of Banks of the State of New
York and by the Department of Banking of the Commonwealth of Pennsylvania. The
firm is also subject to supervision and examination by the Commissioner of Banks
of the Commonwealth of Massachusetts.
Brown Brothers Harriman & Co. provides investment advice and portfolio
management services to the Portfolio. Subject to the general supervision of the
Portfolio's Trustees, Brown Brothers Harriman & Co. makes the day-to-day
investment decisions for the Portfolio, places the purchase and sale orders for
portfolio transactions, and generally manages the Portfolio's investments. Brown
Brothers Harriman & Co. provides a broad range of investment management services
for customers in the United States and abroad. At June 30, 1996, it managed
total assets of approximately $25 billion.
The Portfolio is managed on a day to day basis by a team of individuals
including Mr. John A. Nielsen, Ms. Camille M. Kelleher, Mr. A. Edward Allinson,
Mr. G. Scott Clemons, Mr. Paul J. Fraker and Mr. Ben Kottler. Mr. Nielsen is the
portfolio manager for the Portfolio. Mr. Nielsen is the partner responsible for
international equity investment management at Brown Brothers Harriman & Co. Mr.
Nielsen holds a B.A. from Bucknell University, a M.B.A. from Columbia University
and is a Chartered Financial Analyst. He joined Brown Brothers Harriman & Co. in
1968. Ms. Kelleher, Mr. Allinson, Mr. Clemons, Mr. Fraker and Mr. Kottler are
portfolio managers for the Portfolio. Ms. Kelleher holds a B.A. from Barnard
College and a M.B.A. from Columbia University. She joined Brown Brothers
Harriman & Co. in 1984. Mr. Allinson holds a B.A. and a M.B.A from the
University of Pennsylvania. He joined Brown Brothers Harriman & Co. in 1991. Mr.
Clemons holds a B.A. from Princeton University. He joined Brown Brothers
Harriman & Co. in 1990. Mr. Fraker holds a B.A. from Carleton College and a M.A.
from John Hopkins University. He joined Brown Brothers Harriman & Co. in 1986.
Mr. Kottler holds a B.A. from Durham University. He joined Brown Brothers
Harriman & Co. in 1996.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by Brown Brothers Harriman & Co. under the
Investment Advisory Agreement, Brown Brothers Harriman & Co. receives from the
Portfolio an annual fee, computed daily and payable monthly, equal to 0.65% of
the average daily net assets of the Portfolio. An affiliate of Brown Brothers
Harriman & Co. receives annual administration fees from the Portfolio equal to
0.16% of the average daily net assets of the Portfolio. (See "Administrator"
below.)
The investment advisory services of Brown Brothers Harriman & Co. to
the Portfolio are not exclusive under the terms of the Investment Advisory
Agreement. Brown Brothers Harriman & Co. is free to and does render investment
advisory services to others, including other registered investment companies.
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<PAGE>
ADMINISTRATOR
Brown Brothers Harriman Trust Company (Cayman) Limited acts as the
Administrator of the Portfolio. Brown Brothers Harriman Trust Company (Cayman)
Limited is a wholly-owned subsidiary of Brown Brothers Harriman Trust Company of
New York, which is a wholly-owned subsidiary of Brown Brothers Harriman & Co.
(See "Administrator" in Part B.)
Brown Brothers Harriman Trust Company (Cayman) Limited, in its capacity
as Administrator, administers all aspects of the Portfolio's operations subject
to the supervision of the Trustees except as set forth above under "Investment
Adviser". In connection with its responsibilities as Administrator and at its
own expense, Brown Brothers Harriman Trust Company (Cayman) Limited (i) provides
the Portfolio with the services of persons competent to perform such
supervisory, administrative and clerical functions as are necessary in order to
provide effective administration of the Portfolio, including the maintenance of
certain books and records, receiving and processing requests for increases and
decreases in the beneficial interests in the Portfolio, notification to the
Investment Adviser of available funds for investment, reconciliation of account
information and balances between the Custodian and the Investment Adviser, and
processing, investigating and responding to investor inquiries; (ii) oversees
the performance of administrative and professional services to the Portfolio by
others, including the Custodian; (iii) provides the Portfolio with adequate
office space and communications and other facilities; and (iv) prepares and/or
arranges for the preparation, but does not pay for, the periodic updating of the
Portfolio's registration statement for filing with the Securities and Exchange
Commission (the "SEC"), and the preparation of tax returns for the Portfolio and
reports to investors and the SEC.
For the services rendered to the Portfolio and related expenses borne
by Brown Brothers Harriman Trust Company (Cayman) Limited as Administrator of
the Portfolio, Brown Brothers Harriman Trust Company (Cayman) Limited receives
from the Portfolio an annual fee, computed daily and payable monthly, equal to
0.035% of the Portfolio's average daily net assets.
Pursuant to a Subadministrative Services Agreement with Brown Brothers
Harriman Trust Company (Cayman) Limited, Signature Financial Group (Cayman)
Limited performs such subadministrative duties for the Portfolio as are from
time to time agreed upon by the parties. The offices of Signature Financial
Group (Cayman) Limited are located at Elizabethan Square, George Town, Grand
Cayman, Cayman Islands, BWI. Signature Financial Group (Cayman) Limited is a
wholly-owned subsidiary of Signature Financial Group, Inc. Signature Financial
Group (Cayman) Limited's subadministrative duties may include providing
equipment and clerical personnel necessary for maintaining the organization of
the Portfolio, participation in the preparation of documents required for
compliance by the Portfolio with applicable laws and regulations, preparation of
certain documents in connection with meetings of Trustees of and investors in
the Portfolio, and other functions that would otherwise be performed by the
Administrator as set forth above. For performing such subadministrative
services, Signature Financial Group (Cayman) Limited receives such compensation
as is from time to time agreed upon, but not in excess of the amount paid to the
Administrator from the Portfolio.
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<PAGE>
PLACEMENT AGENT
The Portfolio has not retained the services of a principal underwriter
or distributor, since interests in the Portfolio are offered solely in private
placement transactions. Signature Financial Group (Cayman) Limited, acting as
agent for the Portfolio, serves as the placement agent of interests in the
Portfolio. Signature Financial Group (Cayman) Limited receives no compensation
for serving as placement agent.
CUSTODIAN
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, is the Custodian for the Portfolio.
As Custodian, State Street is responsible for maintaining books and
records of portfolio transactions and holding the Portfolio's securities and
cash pursuant to a custodian agreement with the Portfolio. Cash is held for the
Portfolio in demand deposit accounts at the Custodian. Subject to the
supervision of the Administrator, the Custodian maintains the accounting and
portfolio transaction records for the Portfolio and each day computes the net
asset value and net income of the Portfolio.
INDEPENDENT AUDITORS
Deloitte & Touche, Grand Cayman are the independent auditors of the
Portfolio.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its investment at any time at net asset value. Investors in the
Portfolio (E.G., other investment companies, insurance company separate accounts
and common and commingled trust funds) are each liable for all obligations of
the Portfolio. However, the risk of an investor in the Portfolio incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and the Portfolio itself was unable to meet
its obligations.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required and has no current intention of holding annual meetings of
investors, but the Portfolio will hold special meetings of investors when in the
judgment of the Trustees it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted to investors
for approval. Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the Trustees by a specified
percentage of the outstanding interests in the Portfolio) the right to
communicate with other investors in connection with requesting a meeting of
investors for the purpose of removing one or more Trustees. Investors also have
the right to remove one or more Trustees without a meeting by a declaration in
writing by a specified percentage of the outstanding interests in the Portfolio.
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<PAGE>
Upon liquidation of the Portfolio, investors would be entitled to share pro rata
in the net assets of the Portfolio available for distribution to investors.
The net asset value of the Portfolio is determined each day the New
York Stock Exchange is open for regular trading. This determination is made once
each business day as of 4:00 p.m. New York time.
The net income and capital gains and losses, if any, of the Portfolio
are determined at 4:00 p.m., New York time on each business day. Net income for
days other than business days is determined as of 4:00 p.m., New York time on
the immediately preceding business day. All the net income, as defined below,
and capital gains and losses, if any, so determined are allocated pro rata among
the investors in the Portfolio at the time of such determination.
For this purpose the "net income" of the Portfolio (from the time of
the immediately preceding determination thereof) consists of (i) accrued
interest, accretion of discount and amortization of premium less (ii) all actual
and accrued expenses of the Portfolio (including the fees payable to the
Investment Adviser and Administrator of the Portfolio).
The end of the Portfolio's fiscal year is October 31.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's ordinary income and
capital gain in determining its income tax liability. The determination of such
share will be made in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations promulgated thereunder.
It is intended that the Portfolio's assets, income and distributions
will be managed in such a way that an investor in the Portfolio will be able to
satisfy the requirements of Subchapter M of the Code, assuming that the investor
invested all of its assets in the Portfolio.
Investor inquiries may be directed to Signature Financial Group (Grand
Cayman) Limited, P.O. Box 2494, Elizabethan Square, 2nd Floor, George Town,
Grand Cayman, Cayman Islands, BWI ([809] 945-1824).
ITEM 7. PURCHASE OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by other investment companies, insurance company separate accounts,
common or commingled trust funds, or similar organizations or entities which are
"accredited investors" as defined in Rule 501 under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load. All
investments are made at net asset value next determined after an order is
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<PAGE>
received in "good order" by the Portfolio. The net asset value of the Portfolio
is determined once on each business day.
There is no minimum initial or subsequent investment in the Portfolio.
However, because the Portfolio intends to be as fully invested at all times as
is reasonably practicable in order to enhance the yield on its assets,
investments must be made in federal funds (i.e., monies credited to the account
of the Custodian by a Federal Reserve Bank).
The Portfolio reserves the right to cease accepting investments at any
time or to reject any investment order.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each day the New York Stock Exchange is open for regular
trading. At 4:00 P.M., New York time on each such business day, the value of
each investor's beneficial interest in the Portfolio is determined by
multiplying the net asset value of the Portfolio by the percentage, effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals, which are to be
effected on that day, are then effected. The investor's percentage of the
aggregate beneficial interests in the Portfolio is then recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Portfolio as of 4:00 P.M New York time on such
day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investor's investment in the Portfolio effected on such
day, and (ii) the denominator of which is the aggregate net asset value of the
Portfolio as of 4:00 P.M. New York time, on such day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined is then applied to determine the value of the investor's interest
in the Portfolio as of 4:00 P.M., New York time on the following business day of
the Portfolio.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce all or any portion of its
investment at the net asset value next determined after a request in "good
order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
Portfolio Business Day after the reduction is effected, but in any event within
seven days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the New York Stock Exchange is closed (other than
weekends or holidays) or trading on the New York Stock Exchange is restricted
or, to the extent otherwise permitted by the 1940 Act if an emergency exists.
The Portfolio reserves the right under certain circumstances, such as
accommodating requests for substantial withdrawals or liquidations, to pay
distributions in kind to investors (i.e., to distribute portfolio securities as
opposed to cash). If securities are distributed, an investor could incur
brokerage, tax or other charges in converting the securities to cash. In
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<PAGE>
addition, distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Portfolio.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
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<PAGE>
APPENDIX--HEDGING STRATEGIES
OPTIONS ON STOCK INDEXES. A stock index fluctuates with changes in the
market values of the stocks included in the index. Examples of stock indexes are
the Standard & Poor's 500 Stock Index (Chicago Board of Options Exchange), the
New York Stock Exchange Composite Index (New York Stock Exchange), The Financial
Times-Stock Exchange 100 (London Traded Options Market), the Nikkei 225 Stock
Average (Osaka Securities Exchange) and Tokyo Stock Price Index (Tokyo Stock
Exchange).
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a fixed price ("strike price"), an option
on a stock index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the strike price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier". Receipt of this cash amount
depends upon the closing level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put,
the price of the option. The amount of cash received is equal to such difference
between the closing price of the index and the strike price of the option
expressed in U.S. dollars or a foreign currency, as the case may be, times a
specified multiple.
The effectiveness of purchasing stock index options as a hedging
technique depends upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements of the stock
index selected. The value of an index option depends upon future movements in
the level of the overall stock market measured by the underlying index before
the expiration of the option. Accordingly, the successful use of options on
stock indexes is subject to the Investment Adviser's ability both to select an
appropriate index and to predict future price movements over the short term in
the overall stock market. Brokerage costs are incurred in the purchase of stock
index options and the incorrect choice of an index or an incorrect assessment of
future price movements may result in poorer overall performance than if a stock
index option had not been purchased.
OPTIONS ON CURRENCIES. A call option on a currency gives the purchaser
of the option the right to buy the underlying currency at a fixed price, either
at any time during the option period (American style) or on the expiration date
(European style). Similarly, a put option gives the purchaser of the option the
right to sell the underlying currency at a fixed price, either at any time
during the option period or on the expiration date. To liquidate a put or call
option position, a "closing sale transaction" may be made for a Portfolio at any
time prior to the expiration of the option, such a transaction involves selling
the option previously purchased. Options on currencies are traded both on
recognized exchanges (such as the Philadelphia Options Exchange) and
over-the-counter.
The value of a currency option purchased depends upon future changes in
the value of that currency before the expiration of the option. Accordingly, the
successful use of options on currencies is subject to the Investment Adviser's
ability to predict future changes in the value of currencies over the short
term. Brokerage costs are incurred in the purchase of currency options and an
incorrect assessment of future changes in the value of currencies may result in
a poorer overall performance than if such a currency had not been purchased.
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WS5313B
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS. PAGE
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Fund . . . . . . . . . . . . . . . B-8
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . . . . B-10
Investment Advisory and Other Services . . . . . . . B-11
Brokerage Allocation and Other Practices . . . . . . B-12
Capital Stock and Other Securities . . . . . . . . . B-13
Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . . . . . . B-14
Tax Status . . . . . . . . . . . . . . . . . . . . . B-15
Underwriters . . . . . . . . . . . . . . . . . . . . B-16
Calculations of Performance Data . . . . . . . . . . B-16
Financial Statements . . . . . . . . . . . . . . . . B-17
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
The investment objective of the U.S. Small Company Portfolio (the
"Portfolio") is to provide investors with long-term maximization of total
return, primarily through capital appreciation.
Brown Brothers Harriman & Co. is the Portfolio's investment adviser
(the "Investment Adviser").
The following discussion supplements the information regarding the
investment objective of the Portfolio and the policies to be employed to achieve
this objective as set forth above and in Part A.
EQUITY INVESTMENTS
Equity investments may or may not pay dividends and may or may not
carry voting rights. Common stock occupies the most junior position in a
company's capital structure. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of time
and to receive interest or dividends until the holder elects to convert. The
provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holder's claims on assets
<PAGE>
and earnings are subordinated to the claims of other creditors, and are senior
to the claims of preferred and common shareholders. In the case of convertible
preferred stock, the holder's claims on assets and earnings are subordinated to
the claims of all creditors and are senior to the claims of common shareholders.
DOMESTIC INVESTMENTS
The assets of the Portfolio are not invested in domestic securities
(other than short-term instruments), except temporarily when extraordinary
circumstances prevailing at the same time in a significant number of foreign
countries render investments in such countries inadvisable.
FUTURES AND OPTIONS CONTRACTS
OPTIONS ON STOCK. For the sole purpose of reducing risk, put and call
options on stocks may be purchased for the Portfolio, although the current
intention is not to do so in such a manner that more than 5% of the Portfolio's
net assets would be at risk. A call option on a stock gives the purchaser of the
option the right to buy the underlying stock at a fixed price at any time during
the option period. Similarly, a put option gives the purchaser of the option the
right to sell the underlying stock at a fixed price at any time during the
option period. To liquidate a put or call option position, a "closing sale
transaction" may be made at any time prior to the expiration of the option which
involves selling the option previously purchased.
Covered call options may also be sold (written) on stocks, although in
each case the current intention is not to do so. A call option is "covered" if
the writer owns the underlying security.
FUTURES CONTRACTS ON STOCK INDEXES AND FOREIGN CURRENCIES. For the sole
purpose of reducing risk, futures contracts on stock indexes ("Futures
Contracts") may be entered into for the Portfolio, although the current
intention is not to do so in such a manner that more than 5% of the Portfolio's
net assets would be at risk. Futures contracts on foreign currencies may also be
entered into, although in each case the current intention is not to do so.
In order to assure that the Portfolio is not deemed a "commodity pool"
for purposes of the Commodity Exchange Act, regulations of the Commodity Futures
Trading Commission ("CFTC") require that the Portfolio enter into transactions
in futures contracts and options on futures contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for non-hedging
purposes, provided that the aggregate initial margin and premiums on such non-
hedging positions does not exceed 5% of the liquidation value of the Portfolio's
assets.
Futures Contracts provide for the making and acceptance of a cash
settlement based upon changes in the value of an index of stocks and are used to
hedge against anticipated future changes in overall stock market prices which
otherwise might either adversely affect the value of securities held for the
Portfolio or adversely affect the prices of securities which are intended to be
purchased at a later date. A Futures Contract may also be entered into to close
out or offset an existing futures position.
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In general, each transaction in Futures Contracts involves the
establishment of a position which is expected to move in a direction opposite to
that of the investment being hedged. If these hedging transactions are
successful, the futures positions taken would rise in value by an amount which
approximately offsets the decline in value of the portion of the Portfolio's
investments that is being hedged. Should general market prices move in an
unexpected manner, the full anticipated benefits of Futures Contracts may not be
achieved or a loss may be realized. There is also the risk of a potential lack
of liquidity in the secondary market.
The effectiveness of entering into Futures Contracts as a hedging
technique depends upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements of the stock
index selected. The value of a Futures Contract depends upon future movements in
the level of the overall stock market measured by the underlying index before
the closing out of the Futures Contract. Accordingly, the successful use of
Futures Contracts is subject to the Investment Adviser's ability both to select
an appropriate index and to predict future price movements over the short term
in the overall stock market. The incorrect choice of an index or an incorrect
assessment of future price movements over the short term in the overall stock
market may result in poorer overall performance than if a Futures Contract had
not been purchased. Brokerage costs are incurred in entering into and
maintaining Futures Contracts.
When the Portfolio enters into a Futures Contract, it is initially
required to deposit, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash, U.S. Government
securities or other high grade liquid obligations equal to approximately 3% of
the contract amount. Initial margin requirements are established by the
exchanges on which Futures Contracts trade and may, from time to time, change.
In addition, brokers may establish margin deposit requirements in excess of
those required by the exchanges. Initial margin in futures transactions is
different from margin in securities transactions in that initial margin does not
involve the borrowing of funds by a broker's client but is, rather, a good faith
deposit on the Futures Contract which will be returned upon the proper
termination of the Futures Contract. The margin deposits made are marked to
market daily and the Portfolio may be required to make subsequent deposits of
cash or eligible securities called "variation margin", with its futures contract
clearing broker, which are reflective of price fluctuations in the Futures
Contract.
Currently, Futures Contracts can be purchased on stock indexes such as
the Standard & Poor's 500 Stock Index (Chicago Board of Options Exchange), the
Russell 2000 Index (Chicago Board of Options Exchange) and the New York Stock
Exchange Composite Index (New York Stock Exchange). Investments in Futures
Contracts on non-U.S. stock indexes and options on such Futures Contracts by
U.S. investors, such as the Portfolio, currently are prohibited by the
Commodities Exchange Act unless the CFTC has designated a board of trade as a
contract market for such Futures Contracts or options.
Exchanges may limit the amount by which the price of a Futures Contract
may move on any day. If the price moves equal the daily limit on successive
days,
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<PAGE>
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased.
Another risk which may arise in employing Futures Contracts to protect
against the price volatility of portfolio securities is that the prices of an
index subject to Futures Contracts (and thereby the Futures Contract prices) may
correlate imperfectly with the behavior of the cash prices of portfolio
securities. Another such risk is that the price of the Futures Contract may not
move in tandem with the change in overall stock market prices against which the
Portfolio seeks a hedge.
LOANS OF PORTFOLIO SECURITIES
Securities of the Portfolio may be loaned if such loans are secured
continuously by cash or equivalent liquid securities as collateral or by an
irrevocable letter of credit in favor of the Portfolio at least equal at all
times to 100% of the market value of the securities loaned plus accrued income.
While such securities are on loan, the borrower pays the Portfolio any income
accruing thereon, and cash collateral may be invested for the Portfolio, thereby
earning additional income. All or any portion of interest earned on invested
collateral may be paid to the borrower. Loans are subject to termination by the
Portfolio in the normal settlement time, currently three business days after
notice, or by the borrower on one day's notice. Borrowed securities are returned
when the loan is terminated. Any appreciation or depreciation in the market
price of the borrowed securities which occurs during the term of the loan inures
to the Portfolio and its investors. Reasonable finders' and custodial fees may
be paid in connection with a loan. In addition, all facts and circumstances,
including the creditworthiness of the borrowing financial institution, are
considered before a loan is made and no loan is made in excess of one year.
There is the risk that a borrowed security may not be returned to the Portfolio.
Securities are not loaned to Brown Brothers Harriman & Co. or to any affiliate
of the Corporation, the Portfolio or Brown Brothers Harriman & Co.
SHORT-TERM INVESTMENTS
Although it is intended that the assets of the Portfolio stay invested
in the securities described above and in the Prospectus to the extent practical
in light of the Portfolio's investment objective and long-term investment
perspective, assets of the Portfolio may be invested in short-term instruments
to meet anticipated expenses or for day-to-day operating purposes and when, in
the Investment Adviser's opinion, it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the equity markets.
In addition, when the Portfolio experiences large cash inflows through
additional investments by its investors or the sale of portfolio securities, and
desirable equity securities that are consistent with its investment objective
are unavailable in sufficient quantities, assets may be held in short-term
investments for a limited time pending availability of such equity securities.
Short-term instruments consist of foreign and domestic: (i) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (ii) commercial paper; (iii) bank
obligations, including negotiable certificates of deposit, fixed time deposits
and bankers' acceptances; and (iv) repurchase agreements. Time deposits with a
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maturity of more than seven days are treated as not readily marketable (see
clause (vi) under the caption "State and Federal Restrictions"). At the time the
Portfolio's assets are invested in commercial paper, bank obligations or
repurchase agreements, the issuer must have outstanding debt rated A or higher
by Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("Standard & Poor's"); the issuer's parent corporation, if any, must have
outstanding commercial paper rated Prime-1 by Moody's or A-1 by Standard &
Poor's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Investment Adviser. The assets of the
Portfolio may be invested in non-U.S. dollar denominated and U.S. dollar
denominated short-term instruments, including U.S. dollar denominated repurchase
agreements.
REPURCHASE AGREEMENTS. Repurchase agreements may be entered into for
the Portfolio only with a "primary dealer" (as designated by the Federal Reserve
Bank of New York) in U.S. Government securities. This is an agreement in which
the seller (the "Lender") of a security agrees to repurchase from the Portfolio
the security sold at a mutually agreed upon time and price. As such, it is
viewed as the lending of money to the Lender. The resale price normally is in
excess of the purchase price, reflecting an agreed upon interest rate. The rate
is effective for the period of time assets of the Portfolio are invested in the
agreement and is not related to the coupon rate on the underlying security. The
period of these repurchase agreements is usually short, from overnight to one
week. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of one week from the effective date of the
repurchase agreement. The Portfolio always receives as collateral securities
which are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Collateral is marked to the market daily and has a market
value including accrued interest at least equal to 100% of the dollar amount
invested on behalf of the Portfolio in each agreement along with accrued
interest. Payment for such securities is made for the Portfolio only upon
physical delivery or evidence of book entry transfer to the account of State
Street Bank and Trust Company (the "Custodian"). If the Lender defaults, the
Portfolio might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the Lender, realization upon the collateral on behalf
of the Portfolio may be delayed or limited in certain circumstances. A
repurchase agreement with more than seven days to maturity may not be entered
into for the Portfolio if, as a result, more than 10% of the Portfolio's net
assets would be invested in such repurchase agreement together with any other
instrument which is not readily marketable (see clause (vi) under the caption
"State and Federal Restrictions").
INVESTMENT RESTRICTIONS
The Portfolio is operated under the following investment restrictions
which are deemed fundamental policies and may be changed only with the approval
of the holders of a "majority of the outstanding voting securities" as defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), of the
Portfolio. As used in this Part B, the term "majority of the outstanding voting
securities as defined in the 1940 Act" currently means the vote of (i) 67% or
more of the
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voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present in person or represented by proxy; or
(ii) more than 50% of the outstanding voting securities, whichever is less.
The Portfolio may not:
(1) borrow money or mortgage or hypothecate its assets, except that in
an amount not to exceed 1/3 of the current value of its net assets, it may
borrow money as a temporary measure for extraordinary or emergency purposes, and
except that it may pledge, mortgage or hypothecate not more than 1/3 of such
assets to secure such borrowings (it is intended that money will be borrowed
only from banks and only either to accommodate requests for the withdrawal of
part or all of an interest in the Portfolio while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or other
similar situations), provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely for the
purpose of participating in a captive insurance company sponsored by the
Investment Company Institute; for additional related restrictions (see clause
(i) under the caption "State and Federal Restrictions");
(2) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(3) write, purchase or sell any put or call option or any combination
thereof, provided that this shall not prevent (i) the purchase, ownership,
holding or sale of warrants where the grantor of the warrants is the issuer of
the underlying securities, or (ii) the purchase, ownership, holding or sale of
futures and options, other than the writing of put options;
(4) underwrite securities issued by other persons except insofar as it
may technically be deemed an underwriter under the Securities Act of 1933, as
amended (the "1933 Act") in selling a portfolio security;
(5) make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of its net
assets (taken at market value), (b) through the use of repurchase agreements or
the purchase of short-term obligations and provided that not more than 10% of
its net assets is invested in repurchase agreements maturing in more than seven
days, or (c) by purchasing, subject to the limitation in paragraph (6) below, a
portion of an issue of debt securities of types commonly distributed privately
to financial institutions, for which purposes the purchase of short-term
commercial paper or a portion of an issue of debt securities which are part of
an issue to the public shall not be considered the making of a loan;
(6) knowingly invest in securities which are subject to legal or
contractual restrictions on resale (other than repurchase agreements maturing in
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not more than seven days) if, as a result thereof, more than 10% of its net
assets (taken at market value) would be so invested (including repurchase
agreements maturing in more than seven days);
(7) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and option contracts) in the ordinary course of business (the
freedom of action to hold and to sell real estate acquired as a result of the
ownership of securities is reserved);
(8) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 10% of its net
assets (taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time (it is the
present intention of management to make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes; such
sales would not be made of securities subject to outstanding options);
(9) concentrate its investments in any particular industry, but if it
is deemed appropriate for the achievement of its investment objective, up to 25%
of its assets, at market value at the time of each investment, may be invested
in any one industry, except that positions in futures or option contracts shall
not be subject to this restriction; or
(10) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state
and federal statutes and policies the Portfolio may not as a matter of operating
policy: (i) borrow money for any purpose in excess of 10% of its total assets
(taken at cost) (moreover, securities are not purchased at any time at which the
amount of its borrowings exceed 5% of its total assets (taken at market value)),
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10% of its net
assets (taken at market value), provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction, (iii) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale a right to obtain
securities, without payment of further consideration, equivalent in kind and
amount to the securities sold and provided that if such right is conditional the
sale would be made upon the same conditions, (iv) invest for the purpose of
exercising control or management, (v) purchase securities issued by any
investment company except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other than the
customary
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broker's commission, or except when such purchase, though not made in
the open market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company are not purchased if such
purchase at the time thereof would cause more than 10% of its total assets
(taken at the greater of cost or market value) to be invested in the securities
of such issuers or would cause more than 3% of the outstanding voting securities
of any such issuer to be held for it, (vi) invest more than 10% of its net
assets (taken at the greater of cost or market value) in restricted securities,
securities of companies which, including predecessors, have a record of less
than three years of operations, invest more than 15% of its net assets in
over-the-counter options, time deposits with a maturity of more than seven days,
securities of foreign issuers which are not listed on a recognized domestic or
foreign securities exchange, repurchase agreements maturing in more than seven
days and other securities that are illiquid or otherwise not readily marketable,
(vii) purchase securities of any issuer if such purchase at the time thereof
would cause it to hold more than 10% of any class of securities of such issuer,
for which purposes all indebtedness of an issuer is deemed a single class and
all preferred stock of an issuer is deemed a single class, except that futures
and option contracts are not subject to this restriction, (viii) invest more
than 5% of its assets in companies which, including predecessors, have a record
of less than three years of continuous operation, or (ix) purchase or retain in
its portfolio any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Portfolio, or is an officer or partner of the Investment Adviser, if after the
purchase of the securities of such issuer, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value. These policies are not
fundamental and may be changed without investor approval in response to changes
in the various state and federal requirements.
PERCENTAGE AND RATING RESTRICTIONS. If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in Part A is adhered to at the time an investment is made or assets are so
utilized, a later change in percentage resulting from changes in the value of
the portfolio securities or a later change in the rating of a portfolio security
is not considered a violation of policy. If investment restrictions relating to
any particular investment practice or policy are inconsistent between the
Portfolio and an investor, the Portfolio will adhere to the more restrictive
limitation.
ITEM 14. MANAGEMENT OF THE FUND.
The Trustees and executive officers of the Portfolio, their business
addresses, and principal occupation during the past five years (although their
titles may have varied during the period) are:
TRUSTEES OF THE PORTFOLIO
H.B. ALVORD* -- Chairman of the Board and Trustee; Retired; Trustee of
the Trust (from September 1990 to October 1994); Director of The 59 Wall Street
Fund, Inc. (from September 1990 to October 1994); Trustee of Landmark Funds III,
Landmark Tax Free Reserves, Landmark Multi-State Tax Free Funds, Landmark Tax
Free Income Funds, Landmark Fixed Income Funds, Landmark Funds I, Landmark Funds
II, and Landmark International Equity Fund. His business address is 61 Cliff
Street, Burlington, VT 05401.
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RICHARD L. CARPENTER* -- Trustee; Retired; Director of Internal
Investments, Public School Employees' Retirement System (prior to December
1995). His business address is P.O. Box 5415, Burlington, VT 05402.
CLIFFORD A. CLARK* -- Trustee; Retired; Director of Schmid, Inc.
(prior to July 1993); Managing Director of the Smith-Denison Foundation . His
business address is 42 Clowes Drive, Falmouth, MA 02540.
DAVID M. SEITZMAN* -- Trustee; Practicing Physician with Seitzman,
Shuman, Kwart and Phillips; Director of the National Capital Underwriting
Company, Commonwealth Medical Liability Insurance Co. and National Capital
Insurance Brokerage, Limited (since 1991). His business address is 7117 Nevis
Road, Bethesda, MD 20817.
OFFICERS OF THE PORTFOLIO
PHILIP W. COOLIDGE -- President; Chief Executive Officer and President
of Signature Financial Group, Inc. ("SFG"), 59 Wall Street Distributors, Inc.
("59 Wall Street Distributors") and 59 Wall Street Administrators, Inc. ("59
Wall Street Administrators") (since June 1993).
JAMES E. HOOLAHAN -- Vice President; Senior Vice President of SFG .
JOHN R. ELDER -- Treasurer; Vice President of SFG (since April 1995);
Treasurer of Phoenix Family of Mutual Funds (prior to April 1995).
LINDA T. GIBSON -- Secretary; Vice President and Assistant Secretary,
SFG (since June, 1991); Assistant Secretary of 59 Wall Street Distributors and
59 Wall Street Administrators (since June, 1993); graduate student, Boston
University School of Law (prior to May, 1992).
SUSAN JAKUBOSKI -- Assistant Treasurer and Assistant Secretary of
the Portfolio; Assistant Secretary, Assistant Treasurer and Vice President of
Signature Financial Group (Cayman) Limited (since August 1994); Fund Compliance
Administrator of Concord Financial Group, Inc. (from November 1990 to August
1994). Her business address is 17 Grape Bay Drive, Paget, Bermuda, PG-06.
MOLLY S. MUGLER -- Assistant Secretary; Vice President and Assistant
Secretary of SFG; Assistant Secretary of 59 Wall Street Distributors and 59 Wall
Street Administrators (since June 1993) .
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* These Directors and Trustees are members of the Audit Committee of the
Corporation or the Portfolio, as the case may be.
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The address of each officer of the Portfolio, except for Ms.
Jakuboski is 6 St. James Avenue, Boston, Massachusetts 02116. Messrs. Coolidge,
Hoolahan and Elder and Mss. Gibson, Jakuboski and Mugler also hold similar
positions with other investment companies for which affiliates of 59 Wall
Street Distributors serves as the principal underwriter.
Except for Mr. Shields, no Director is an "interested person" of the
Corporation or the Portfolio as that term is defined in the 1940 Act.
The Trustees of the Portfolio receive a base annual fee of $12,000
(except the Chairman who receives a base annual fee of $17,000) which is paid
jointly by the U.S. Money Market Portfolio, U.S. Small Company Portfolio
together with the Portfolio (the "Portfolios") and allocated among the
Portfolios based upon their respective net assets. In addition, each Portfolio
which has commenced operations pays an annual fee to each Trustee of $1,000. The
aggregate compensation to each Trustee from the Portfolios was less than
$60,000.
No Trustee of the Portfolio is an "interested person" of the Portfolio
as that term is defined in the 1940 Act.
By virtue of the responsibilities assumed by Brown Brothers Harriman &
Co. under the Investment Advisory Agreement with the Portfolio and by Brown
Brothers Harriman Trust Company (Cayman) Limited under the Administration
Agreement with the Portfolio (see "Investment Adviser" and "Administrator"), the
Portfolio requires no employees other than its officers, and none of its
officers devote full time to the affairs of the Portfolio or, other than the
Chairman, receive any compensation from the Portfolio.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of February 24, 1997, United Food & Commercial Workers' Pension Plan
owned 81.0%, Brown Brothers Harriman Employees' Pension Plan owned 13.0%, Union
Pacific Resources owned 7% and Brown Brothers Harriman Trust Company (Cayman)
Limited owned 1% of the outstanding beneficial interests in the Portfolio. A
holder who controls more than 25% of the outstanding beneficial interests in the
Portfolio may take actions without the approval of any other holder of
beneficial interest in the Portfolio.
Brown Brothers Harriman Trust Company (Cayman) Limited has informed the
Portfolio that whenever it is requested to vote on matters pertaining to the
Portfolio (other than a vote by the Portfolio to continue the operation of the
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Portfolio upon the withdrawal of another investor in the Portfolio), it will
hold a meeting of its shareholders and will cast its vote as instructed by those
shareholders.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
INVESTMENT ADVISER. Under its Investment Advisory Agreement with the
Portfolio, subject to the general supervision of the Portfolio's Trustees and in
conformance with the stated policies of the Portfolio, Brown Brothers Harriman &
Co. provides investment advice and portfolio management services to the
Portfolio. In this regard, it is the responsibility of Brown Brothers Harriman &
Co. to make the day-to-day investment decisions for the Portfolio, to place the
purchase and sale orders for portfolio transactions and to manage, generally,
the Portfolio's investments.
The Investment Advisory Agreement between Brown Brothers Harriman & Co.
and the Portfolio is dated August 23, 1994 and remains in effect for two years
from such date and thereafter, but only as long as the agreement is specifically
approved at least annually (i) by a vote of the holders of a "majority of the
outstanding voting securities as defined in the 1940 Act" of the Portfolio, or
by the Portfolio's Trustees, and (ii) by a vote of a majority of the Trustees of
the Portfolio who are not parties to the Investment Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of the Portfolio ("Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
approval. The Investment Advisory Agreement was most recently approved by the
Independent Trustees on December 11, 1996. The Investment Advisory Agreement
terminates automatically if assigned and is terminable at any time without
penalty by a vote of a majority of the Trustees of the Portfolio or by a vote of
the holders of a "majority of the outstanding voting securities as defined in
the 1940 Act" of the Portfolio on 60 days' written notice to Brown Brothers
Harriman & Co. and by Brown Brothers Harriman & Co. on 90 days' written notice
to the Portfolio.
The investment advisory fee paid to the Investment Adviser is
calculated daily and paid monthly at an annual rate equal to 0.65% of the
Portfolio's average daily net assets. For the fiscal year ended October 31, 1996
and the period April 1, 1995 through October 31, 1995, the Portfolio incurred
$226,127 and $94,833 for advisory fees, respectively.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting, selling or distributing securities and
from sponsoring, organizing or controlling a registered open-end investment
company continuously engaged in the issuance of its shares. There is presently
no controlling precedent prohibiting financial institutions such as Brown
Brothers Harriman & Co. from performing investment advisory or administrative
functions. If Brown Brothers Harriman & Co. were to terminate its Investment
Advisory Agreement with the Portfolio, or were prohibited from acting in such
capacity, it is expected that the Trustees of the Portfolio would recommend to
the investors that they approve a new investment advisory agreement for the
Portfolio with another qualified adviser.
ADMINISTRATOR. The Administration Agreement between the Portfolio and
Brown Brothers Harriman Trust Company (Cayman) Limited (dated August 23, 1994)
will remain in effect for two years from such date and thereafter, but only so
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long as the agreement is specifically approved at least annually in the
same manner as the Investment Advisory Agreement (see "Investment Adviser"). The
Independent Trustees most recently approved the Portfolio's Administration
Agreement on December 11, 1996. The agreement will terminate automatically if
assigned by either party thereto and is terminable by the Portfolio at any time
without penalty by a vote of a majority of the Trustees of the Portfolio, or by
a vote of the holders of a "majority of the outstanding voting securities as
defined in the 1940 Act" of the Portfolio. The Portfolio's Administration
Agreement is terminable by the Trustees of the Portfolio or by investors in the
Portfolio on 60 days' written notice to Brown Brothers Harriman Trust Company
(Cayman) Limited. The agreement is terminable by the Administrator on 90 days'
written notice to the Portfolio.
The administrative fee paid to Brown Brothers Harriman Trust Company
(Cayman) Limited by the Portfolio is calculated and paid monthly at an annual
rate equal to 0.035% of the Portfolio's average daily net assets. Brown Brothers
Harriman Trust Company (Cayman) Limited is a wholly-owned subsidiary of Brown
Brothers Harriman Trust Company of New York, which is a wholly-owned subsidiary
of Brown Brothers Harriman & Co. For the fiscal year ended October 31, 1996 and
the period April 1, 1995 through October 31, 1995, the Portfolio incurred
$12,176 and $5,106,respectively, for administrative services.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
In effecting securities transactions for the Portfolio, the Investment
Adviser seeks to obtain the best price and execution of orders. In selecting a
broker, the Investment Adviser considers a number of factors including: the
broker's ability to execute orders without disturbing the market price; the
broker's reliability for prompt, accurate confirmations and on-time delivery of
securities; the research and other investment information provided by the
broker; and the commissions charged. Accordingly, the commissions charged by any
such broker may be greater than the amount another firm might charge if the
Investment Adviser determines in good faith that the amount of such commissions
is reasonable in relation to the value of the brokerage services and research
information provided by such broker.
Portfolio securities are not purchased from or sold to the
Administrator or Investment Adviser or any "affiliated person" (as defined in
the 1940 Act) of the Administrator or Investment Adviser when such entities are
acting as principals, except to the extent permitted by law.
All of the transactions for the Portfolio are executed through
qualified brokers. In selecting such brokers, the Investment Adviser may
consider the research and other investment information provided by such brokers.
Research services provided by brokers to which Brown Brothers Harriman & Co. has
allocated brokerage business in the past include economic statistics and
forecasting services, industry and company analyses, portfolio strategy
services, quantitative data, and consulting services from economists and
political analysts. Research services furnished by brokers are used for the
benefit of all the Investment Adviser's clients and not solely or necessarily
for the benefit of the Portfolio. The Investment Adviser believes that the value
of research services received is not determinable nor does such research
significantly reduce its expenses.
For the fiscal year ended October 31, 1996, the aggregate commissions
paid by the Portfolio were $118,314.
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The Trustees of the Portfolio review regularly the reasonableness of
commissions and other transaction costs incurred for the Portfolio in light of
facts and circumstances deemed relevant from time to time and, in that
connection, receive reports from the Investment Adviser and published data
concerning transaction costs incurred by institutional investors generally.
Over-the-counter purchases and sales are transacted directly with
principal market makers, except in those circumstances in which, in the judgment
of the Investment Adviser, better prices and execution of orders can otherwise
be obtained. If the Portfolio effects a closing transaction with respect to a
futures or option contract, such transaction normally would be executed by the
same broker-dealer who executed the opening transaction. The writing of options
by the Portfolio may be subject to limitations established by each of the
exchanges governing the maximum number of options in each class which may be
written by a single investor or group of investors acting in concert, regardless
of whether the options are written on the same or different exchanges or are
held or written in one or more accounts or through one or more brokers. The
number of options which the Portfolio may write may be affected by options
written by the Investment Adviser for other investment advisory clients. An
exchange may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
On those occasions when Brown Brothers Harriman & Co. deems the
purchase or sale of a security to be in the best interests of the Portfolio as
well as other customers, Brown Brothers Harriman & Co., to the extent permitted
by applicable laws and regulations, may, but is not obligated to, aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other customers in order to obtain best execution, including lower
brokerage commissions, if appropriate. In such event, allocation of the
securities so purchased or sold as well as any expenses incurred in the
transaction are made by Brown Brothers Harriman & Co. in the manner it considers
to be most equitable and consistent with its fiduciary obligations to its
customers, including the Portfolio. In some instances, this procedure might
adversely affect the Portfolio.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees if they choose to do so
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and in such event the other investors in the Portfolio would not be able to
elect any Trustee. The Portfolio is not required and has no current intention to
hold annual meetings of investors but the Portfolio will hold special meetings
of investors when in the judgment of the Portfolio's Trustees it is necessary or
desirable to submit matters for an investor vote. No material amendment may be
made to the Portfolio's Declaration of Trust without the affirmative majority
vote of investors (with the vote of each being in proportion to the amount of
its investment).
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two thirds of its
investors (with the vote of each being in proportion to its percentage of the
beneficial interests in the Portfolio), except that if the Trustees recommend
such sale of assets, the approval by vote of a majority of the investors (with
the vote of each being in proportion to its percentage of the beneficial
interests of the Portfolio) will be sufficient. The Portfolio may also be
terminated (i) upon liquidation and distribution of its assets if approved by
the vote of two thirds of its investors (with the vote of each being in
proportion to the amount of its investment) or (ii) by the Trustees by written
notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Portfolio's Declaration of Trust further provides that obligations
of the Portfolio are not binding upon the Trustees individually but only upon
the property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of wilful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED.
Beneficial interests in the Portfolio are issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act.
The value of investments listed on a domestic securities exchange is
based on the last sale prices as of the regular close of the New York Stock
Exchange (which is currently 4:00 P.M New York time) or, in the absence of
recorded
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sales, at the average of readily available closing bid and asked prices on such
Exchange.
Unlisted securities are valued at the average of the quoted bid and
asked prices in the over-the-counter market. The value of each security for
which readily available market quotations exist is based on a decision as to the
broadest and most representative market for such security.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures established by
and under the general supervision and responsibility of the Portfolio's
Trustees. Such procedures include the use of independent pricing services, which
use prices based upon yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. Short-term investments which mature in 60 days or less are
valued at amortized cost if their original maturity was 60 days or less, or by
amortizing their value on the 61st day prior to maturity, if their original
maturity when acquired was more than 60 days, unless this is determined not to
represent fair value by the Trustees of the Portfolio.
If the Portfolio determines that it would be detrimental to the best
interest of the remaining investors in the Portfolio to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with the applicable rules of the Securities and Exchange Commission
(the "SEC"). If interests are redeemed in kind, the redeeming investor might
incur transaction costs in converting the assets into cash. The method of
valuing portfolio securities is described above and such valuation will be made
as of the same time the redemption price is determined.
ITEM 20. TAX STATUS.
The Portfolio is organized as a New York trust. The Portfolio is not
subject to any income or franchise tax in the State of New York or the
Commonwealth of Massachusetts. However each investor in the Portfolio will be
taxable on its share (as determined in accordance with the governing instruments
of the Portfolio) of the Portfolio's ordinary income and capital gain in
determining its income tax liability. The determination of such share will be
made in accordance with the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations promulgated thereunder.
Although, as described above, the Portfolio will not be subject to
federal income tax, it will file appropriate income tax returns.
It is intended that the Portfolio's assets will be managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Code.
Gains or losses on sales of securities by the Portfolio will be treated
as long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where, if applicable, the Portfolio
acquires a put or writes a call thereon. Other gains or losses on the sale of
B-15
<PAGE>
securities will be short-term capital gains or losses. Gains and losses on the
sale, lapse or other termination of options on securities will be treated as
gains and losses from the sale of securities. If an option written by the
Portfolio lapses or is terminated through a closing transaction, such as a
repurchase by the Portfolio of the option from its holder, the Portfolio will
realize a short-term capital gain or loss, depending on whether the premium
income is greater or less than the amount paid by the Portfolio in the closing
transaction. If securities are purchased by the Portfolio pursuant to the
exercise of a put option written by it, the Portfolio will subtract the premium
received from its cost basis in the securities purchased.
Forward currency contracts, options and futures contracts entered into
by the Portfolio may create "straddles" for U.S. federal income tax purposes and
this may affect the character and timing of gains or losses realized by the
Portfolio on forward currency contracts, options and futures contracts or on the
underlying securities. Straddles may also result in the loss of the holding
period of underlying securities for purposes of the 30% of gross income test
described above, and therefore, the Portfolio's ability to enter into forward
currency contracts, options and futures contracts may be limited.
Certain options, futures and foreign currency contracts held by the
Portfolio at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes--i.e., treated as having been sold at
market value. For options and futures contracts, 60% of any gain or loss
recognized on these deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss regardless of how long the Portfolio has held such options
or futures. Any gain or loss recognized on foreign currency contracts will be
treated as ordinary income.
FOREIGN INVESTORS. Allocations of U.S. source dividend income to an
investor who, as to the United States, is a foreign trust, foreign corporation
or other foreign investor will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Allocations of Portfolio interest or short term or
net long term capital gains to foreign investors will not be subject to U.S.
tax.
FOREIGN TAXES. The Portfolio may be subject to foreign withholding
taxes with respect to income received from sources within foreign countries.
OTHER TAXATION. The investment by an investor in the Portfolio does not
cause the investor to be liable for any income or franchise tax in the State of
New York. Investors are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Portfolio.
ITEM 21. UNDERWRITERS.
The placement agent for the Portfolio is Signature (Cayman), which
receives no compensation for serving in this capacity. Other investment
companies, insurance company separate accounts, common and commingled trust
funds and similar organizations and entities may continuously invest in the
Portfolio.
B-16
<PAGE>
ITEM 22. CALCULATIONS OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The Portfolio's current annual report to shareholders as filed with the
SEC pursuant to section 30(b) of the 1940 Act and Rule 30b2-1 thereunder is
hereby incorporated herein by reference.
WS5313A
<PAGE>
WS5313A
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Portfolio of Investments at October 31, 1996
Statement of Assets and Liabilities at October 31, 1996
Statement of Operations at October 31, 1996
Statement of Changes in Net Assets for the year ended October 31, 1996
and the period April 1, 1995 (commencement of operations) to
October 31, 1995
Financial Highlights for the period April 1, 1995 (commencement of
operations) to October 31, 1995
Notes to Financial Statements
Independent Auditors' Report
(B) EXHIBITS
1 Declaration of Trust of the Registrant as amended(2)
2 By-Laws of the Registrant(2)
5 Investment Advisory Agreement between the Registrant and Brown
Brothers Harriman & Co(2)
8 Custodian Contract between the Registrant and State Street Bank and
Trust Company(1)
9(a)Administration Agreement between the Registrant and Brown Brothers
Harriman Trust Company (Cayman) Limited(1)
9(b)Sub-administration Agreement between the Registrant and
Brown Brothers Harriman Trust Company (Cayman) Limited(1)
13 Investment representation letters of initial investors(1)
17 Financial Data Schedule(3)
- ----------------
(1) Incorporated herein by reference from the registration statement as
initially filed with the Securities and Exchange Commission on March 8,
1995.
(2) Incorporated herein by reference from Amendment No. 1 to the
registration statement as filed with the Securities and Exchange
Commission on February 28, 1996.
(3) Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Beneficial Interests 3 (as of February 26, 1997)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as an Exhibit herewith.
The Trustees and officers of the Registrant are insured under an errors
and omissions liability insurance policy. The Registrant and its officers are
also insured under the fidelity bond required by Rule 17g-1 under the Investment
Company Act of 1940, as amended.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Registrant's investment adviser, Brown Brothers Harriman & Co., is
a New York limited partnership. Brown Brothers Harriman & Co. conducts a general
banking business and is a member of the New York Stock Exchange.
To the knowledge of the Registrant, none of the general partners or
officers of Brown Brothers Harriman & Co. is engaged in any other business,
profession, vocation or employment of a substantial nature.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
C-2
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder are maintained at the offices of:
The U.S. Small Company Portfolio
Butterfield House, 4th Floor
Fort Street, P.O. Box 2330
George Town, Grand Cayman
Cayman Islands, BWI
Brown Brothers Harriman & Co.
59 Wall Street
New York, NY 10005
(investment adviser)
Brown Brothers Harriman Trust Company (Cayman) Limited
Butterfield House, 4th Floor
Fort Street, P.O. Box 2330
George Town, Grand Cayman,
Cayman Islands, BWI
(administrator)
Signature Financial Group (Cayman) Limited
P.O. Box 2494
Elizabethan Square, 2nd Floor
George Town, Grand Cayman
Cayman Islands, BWI
(placement agent and subadministrator)
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
(custodian)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereto duly authorized
in the Paget, Bermuda on the 28th day of February, 1997.
THE 59 WALL STREET INTERNATIONAL EQUITY PORTFOLIO
By /s/ SUSAN JAKUBOSKI
(Susan Jakuboski, Assistant Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated above.
Signature Title
PHILIP W. COOLIDGE* President of the Portfolio
(Philip W. Coolidge)
H.B. ALVORD* Trustee and Chairman of the Board
(H.B. Alvord)
RICHARD L. CARPENTER* Trustee
(Richard L. Carpenter)
CLIFFORD A. CLARK* Trustee
(Clifford A. Clark)
DAVID M. SEITZMAN* Trustee
(David M. Seitzman)
JOHN R. ELDER* Treasurer of the Portfolio
(John R. Elder)
*By: /s/SUSAN JAKUBOSKI
Susan Jakuboski as Attorney-in-Fact pursuant to
Powers of Attorney filed previously.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
17 Financial Data Schedule.
WS5313B
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
International Equity Portfolio Annual Report dated 10/31/96 and is qualified in
its entirety by reference to such Annual Report.
</LEGEND>
<CIK> 0001003015
<NAME> INTERNATIONAL EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 38373698
<INVESTMENTS-AT-VALUE> 39057824
<RECEIVABLES> 511732
<ASSETS-OTHER> 569803
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40139359
<PAYABLE-FOR-SECURITIES> 612774
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42137
<TOTAL-LIABILITIES> 654911
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38456422
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<DIVIDEND-INCOME> 521060
<INTEREST-INCOME> 29723
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<NET-INVESTMENT-INCOME> 237627
<REALIZED-GAINS-CURRENT> 1907166
<APPREC-INCREASE-CURRENT> 1134561
<NET-CHANGE-FROM-OPS> 3279354
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11293588
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 226127
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<GROSS-EXPENSE> 313156
<AVERAGE-NET-ASSETS> 34788789
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
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<EXPENSE-RATIO> 0.90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
