As filed with the Securities and Exchange Commission on October 16, 1997
File No. 811-9130
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
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SCHRODER CAPITAL FUNDS
(Exact Name of Registrant as Specified in its Charter)
Two Portland Square, Portland, Maine 04101
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code: 207-879-1900
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Catherine S. Wooledge, Esq.
Forum Financial Services, Inc.
Two Portland Square
Portland, Maine 04101
(Name and Address of Agent for Service)
Copies to:
Timothy W. Diggins, Esq.
Ropes & Gray
One International Place
Boston, MA 02110-2624
Alexandra Poe, Esq.
Schroder Capital Management International Inc.
787 seventh Avenue, 34th Floor
New York, New York 10019
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EXPLANATORY NOTE
This Registration Statement is being filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended.
THIS REGISTRATION STATEMENT DOES NOT EFFECT THE PREVIOUSLY FILED PARTA AND PART
B FOR INTERNATIONAL EQUITY FUND, SCHRODER EMERGING MARKETS FUND INSTITUTIONAL
PORTFOLIO, SCHRODER EM CORE PORTFOLIO, OR SCHRODER INTERNATIONAL SMALLER
COMPANIES PORTFOLIO.
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PART A
(PRIVATE PLACEMENT MEMORANDUM)
SCHRODER CAPITAL FUNDS
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SCHRODER GLOBAL GROWTH PORTFOLIO
OCTOBER 14, 1997
INTRODUCTION
Schroder Capital Funds (the "Trust") is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The Trust is authorized to offer beneficial interests ("Interests") in separate
series, each with a distinct investment objective and policies (each, a
"portfolio" and collectively, the "portfolios"). The Trust currently offers six
portfolios: Schroder Global Growth Portfolio (the "Portfolio"), International
Equity Fund, Schroder EM Core Portfolio, Schroder Emerging Markets Fund
Institutional Portfolio, Schroder International Smaller Companies Portfolio, and
Schroder U.S. Smaller Companies Portfolio. Additional portfolios may be added in
the future. This Part A relates solely to the Portfolio. Schroder Capital
Management International Inc. ("SCMI") is the Portfolio's investment adviser.
Interests are offered on a no-load basis exclusively to various qualified
investors (including other investment companies) as described under "General
Description of Registrant". Interests of the Trust are not offered publicly and,
accordingly, are not registered under the Securities Act of 1933 (the "1933
Act").
GENERAL DESCRIPTION OF THE TRUST
The Trust was organized as a business trust under the laws of the State of
Delaware on September 7, 1995 under a Trust Instrument dated September 6, 1995.
The Trust has an unlimited number of authorized Interests. The assets of the
Portfolio, and of any other portfolio now existing or created in the future,
belong only to the Portfolio or that other portfolio, as the case may be. The
assets belonging to a portfolio are charged with the liabilities of and all
expenses, costs, charges and reserves attributable to that portfolio. The
Portfolio is classified as "diversified" under the 1940 Act and commenced
operations on or about October 14, 1997.
Interests in the Portfolio are offered 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 be made only by certain qualified
investors (generally excluding S corporations, partnerships, and grantor trusts
beneficially owned by any individuals, S corporations, or partnerships).
Investors may be organized within or outside the U.S. 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.
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek long-term growth of capital. It
seeks to achieve this objective by investing in common stocks of companies
located anywhere in the world, including the United States. There can be no
assurance that the Portfolio will achieve its investment objective.
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INVESTMENT POLICIES
The Portfolio's fundamental investment policies may not be changed without a
vote of approval by the holders of a majority of the Portfolio's outstanding
voting Interests (defined in the same manner as the phrase "vote of a majority
of the outstanding voting securities" is defined in the 1940 Act). Unless
otherwise indicated, investment policies are not fundamental and may be changed
by the Trust's Board of Trustees (the "Board") without prior investor approval.
The following specific policies and limitations are considered at the time of
any purchase. Additional investment policies, techniques, risks and restrictions
concerning the Portfolio's investments are described below and under "Investment
Risks" and "Investment Restrictions" in Part A and in Part B.
Global Growth Portfolio invests in common stocks of companies located in
developed, newly industrialized and emerging markets. Under normal market
conditions, the Portfolio invests at least 65% of its total assets in equity
securities of companies located in at least five countries, one of which is the
United States. Equity securities include common stocks, preferred stocks,
convertible preferred stocks, stock rights and warrants, and convertible debt
securities. Investments in stock rights and warrants are not considered in the
65% of total assets determination. The Portfolio may purchase stocks without
regard to a company's market capitalization, although investments generally are
concentrated in larger and, to a lesser extent, medium-sized companies relative
to the particular market. The percentage of the Portfolio's assets invested in
U.S. and non-U.S. stocks varies over time in accordance with the investment
adviser's outlook.
Stock selection is at the heart of SCMI's investment process. SCMI emphasizes
fundamental company analysis in seeking companies that it believes have a
sustainable competitive advantage and whose growth potential is undervalued by
investors. In selecting companies for investment, SCMI considers historical
growth rates and future growth prospects, management capability, competitive
position in both domestic and export markets, and other factors. SCMI also seeks
to add value through active geographic allocation. Its allocation decisions are
based upon its assessment of the likelihood that the country will have a
favorable long-term business environment in which corporate growth will not be
impeded materially by adverse macroeconomics or political factors.
COMMON AND PREFERRED STOCK AND WARRANTS. Common stockholders are the owners of
the company issuing the stock and, accordingly, vote on various corporate
governance matters such as mergers. They are not creditors of the company, but
rather, upon liquidation of the company, are entitled to their pro rata share of
the company's assets after creditors (including fixed income security holders)
and preferred stockholders, if any, are paid. Preferred stock is a class of
stock having a preference over common stock as to dividends and, generally, as
to the recovery of investment. A preferred stockholder is also a shareholder and
not a creditor of the company. Equity securities owned by a Portfolio may be
traded in the over-the-counter market or on a securities exchange, but may not
be traded every day or in the volume typical of securities traded on a major
U.S. national securities exchange. As a result, disposition by an Equity
Portfolio of a security to meet withdrawals by interestholders or otherwise may
require the Portfolio to sell these securities at a discount from market prices,
to sell during periods when disposition is not desirable, or to make many small
sales over a lengthy period of time. The market value of all securities,
including equity securities, is based upon the market's perception of value and
not necessarily the "book value" of an issuer or other objective measure of a
company's worth.
The Portfolio may also invest in warrants. Warrants are options to purchase an
equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time.
DERIVATIVE INVESTMENTS. The Portfolio may from time to time use various
derivative instruments to protect its investment portfolio from movements in
securities prices, interest rates and currency exchange rates. Derivative
instruments include futures contracts on securities, financial indices and
foreign currencies; options on futures contracts and on securities, financial
indices and foreign currencies; and interest rate swaps and swap-related
products. The Portfolio uses derivative instruments primarily to hedge the value
of its portfolio against potential adverse movements in securities prices,
foreign currency markets or interest rates. To a limited extent, the Portfolio
may also use derivative instruments for non-hedging purposes such as seeking to
increase the Portfolio's income or otherwise seeking to enhance return.
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FOREIGN EXCHANGE CONTRACTS. When investing in foreign securities, the Portfolio
usually effects currency exchange transactions on a spot (I.E., cash) basis at
the spot rate prevailing in the foreign exchange market. The Portfolio may use a
variety of currency hedging techniques, including forward currency contracts, to
manage exchange-rate risk when investing in securities denominated in foreign
currencies. Changes in currency exchange rates affect the U.S.-dollar values of
securities denominated in foreign currencies. Exchange rates between the U.S.
dollar and other currencies fluctuate in response to forces of supply and demand
in the foreign exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation, and other factors, many of which may be difficult (if
not impossible) to predict. The Portfolio incurs foreign exchange expenses in
converting assets from one currency to another.
The Portfolio may enter into foreign currency forward contracts to purchase or
sell foreign currencies in anticipation of its currency requirements and to
protect against possible adverse movements in foreign exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. This
method of attempting to hedge the value of portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities and may expose the Portfolio to the risk
that the counterparty is unable to perform. Although such contracts may reduce
the risk of loss to the Portfolio due to a decline in the value of the currency
sold, they also limit any possible gain that might result should the value of
such currency rise. The Portfolio does not intend to maintain a net exposure to
such contracts where the fulfillment of obligations under such contracts would
obligate it to deliver an amount of foreign currency in excess of the value of
its portfolio securities or other assets denominated in the currency. These
contracts involve a risk of loss if the investment adviser fails to predict
currency values correctly. The Portfolio has no present intention to enter into
currency futures or options contracts, but may do so in the future. (See "Risk
Considerations -- Currency Fluctuations and Devaluations".)
DEBT SECURITIES. The Portfolio may seek capital appreciation through investment
in convertible or non-convertible debt securities. Capital appreciation in debt
securities may arise as a result of a favorable change in relative foreign
exchange rates, in relative interest rate levels, or in the creditworthiness of
issuers. The receipt of income from these securities is incidental to the
Portfolio's objective of long-term capital appreciation. Such income can be
used, however, to offset the operating expenses of the Portfolio. The Portfolio
may invest to a certain extent in debt securities in order to participate in
debt-to-equity conversion programs incident to corporate reorganizations.
The Portfolio may invest in debt securities issued or guaranteed by the U.S.
Government and foreign governments (including countries, provinces and
municipalities) or their agencies, instrumentalities, and government-sponsored
enterprises; debt securities issued or guaranteed by international organizations
designated or supported by multiple foreign governmental entities (which are not
obligations of foreign governments) to promote economic reconstruction or
development; and, debt securities issued by corporations or financial
institutions.
U.S. GOVERNMENT SECURITIES. U.S. government securities include U.S. Treasury
bills and other securities and obligations issued or guaranteed by U.S.
Government agencies, instrumentalities and government-sponsored enterprises that
are backed by the full faith and credit of the U.S. Government, such as those
guaranteed by the Small Business Administration or issued by the Government
National Mortgage Association. In addition, U.S. government securities include
securities supported primarily or solely by the creditworthiness of the issuer,
such as securities of the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation and the Tennessee Valley Authority. There is no
guarantee that the U.S. Government will support securities not backed by its
full faith and credit. (See Part B for further information about these
securities.)
BRADY BONDS. The Portfolio may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructuring (under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady). Brady Bonds have been issued only
recently and, therefore, do not have a long payment history. Brady Bonds may
have collateralized and uncollateralized components, are issued in various
currencies, and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered U.S. government securities. In
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light of the residual risk associated with the uncollateralized portions of
Brady Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are considered speculative. Brady Bonds could
be subject to restructuring arrangements or to requests for new credit, which
could cause the Portfolio to suffer a loss of interest or principal on its
holdings. (For further information see "Brady Bonds", in Part B.)
AMERICAN DEPOSITORY RECEIPTS ("ADRS"). Due to the absence of established
securities markets in certain emerging market countries and restrictions in
certain countries on direct investment by foreign entities, the Portfolio may
invest in certain emerging market issuers through the purchase of sponsored and
unsponsored American Depository Receipts or other similar securities, such as
American Depository Shares, Global Depository Shares or International Depository
Receipts. ADRs are receipts typically issued by U.S. banks evidencing ownership
of the underlying securities into which they are convertible. These securities
may or may not be denominated in the same currency as the underlying securities.
Unsponsored ADRs may be created without the participation of the foreign issuer.
Holders of unsponsored ADRs generally bear all the costs of the ADR facility,
whereas foreign issuers typically bear certain costs in a sponsored ADR. The
bank or trust company depository of an unsponsored ADR may be under no
obligation to distribute shareholder communications received from the foreign
issuer or to pass through voting rights.
REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase agreements, which
are a means of investing monies for a short period. Under a repurchase
agreement, a seller -- a bank or recognized broker-dealer -- sells securities to
the Portfolio and agrees to repurchase them (at the Portfolio's cost plus
interest) within a specified period (normally one day). The value of the
underlying securities purchased by the Portfolio is monitored to ensure that the
total value of the collateral given to secure the seller's repurchase obligation
equals or exceeds the value of the repurchase agreement. The Portfolio's
custodian bank holds the collateral until the repurchase agreement has matured.
If the seller defaults under a repurchase agreement, the Portfolio may have
difficulty exercising its rights to the underlying collateral and may incur
costs and experience time delays in disposing of it. To evaluate potential risk,
SCMI reviews the creditworthiness of banks and dealers with which the Portfolio
enters into repurchase agreements.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend portfolio securities to
brokers, dealers and other financial institutions meeting specified credit
conditions if the loan is collateralized in accordance with applicable
regulatory requirements and if, after any loan, the value of the securities
loaned does not exceed one-third of the value of the Portfolio's total assets.
In the event of the other party's bankruptcy, the Portfolio could experience
delays in recovering the securities loaned, and potentially, a loss.
The Portfolio may lend its securities if it maintains in a segregated account
liquid assets equal to the current market value of the securities loaned
(including accrued interest thereon) plus the loan interest payable to the
Portfolio. Any securities that the Portfolio receives as collateral do not
become part of its portfolio at the time of the loan. In the event of a default
by the borrower, the Portfolio will (if permitted by law) dispose of such
collateral except for such part thereof that is a security in which the
Portfolio is permitted to invest. While the securities are on loan, the borrower
pays the Portfolio any accrued income on those securities, and the Portfolio may
invest the cash collateral and earn income or receive an agreed upon fee from a
borrower that has delivered cash equivalent collateral. Cash collateral received
by the Portfolio is invested in U.S. government securities and liquid high-grade
debt or equity obligations. The value of securities loaned is marked to market
daily. Portfolio securities purchased with cash collateral are subject to
possible depreciation. Loans of securities by the Portfolio are subject to
termination at the Portfolio's or the borrower's option. The Portfolio may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and approved by the Board. (See "Loans
of Portfolio Securities" in the SAI for further information on securities
loans.)
LIQUIDITY. The Portfolio does not invest more than 15% of its assets in
securities determined by SCMI to be illiquid. Securities that may be resold to
certain institutional customers under Rule 144A of the Securities act of 1933 or
Section 4(2) paper issued under that Act that has an active secondary market may
be determined by SCMI to be liquid for purposes of compliance with the
Portfolio's limitations on illiquid investments. There is no guarantee that the
Portfolio will be able to sell such securities at any time when SCMI deems it
advisable to do so or
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at prices prevailing for comparable securities that are more widely held. (See
"Investment Policies -- Illiquid and Restricted Securities" in Part B for
further information.)
INVESTMENT IN OTHER INVESTMENT COMPANIES OR VEHICLES. The Portfolio is permitted
to invest in certain emerging markets through governmentally authorized
investment vehicles or companies. Pursuant to the 1940 Act, the Portfolio may
invest in the shares of other investment companies which invest in securities
that the Portfolio is permitted to purchase subject to the limits permitted
under the 1940 Act or any orders, rules or regulations thereunder. When
investing through investment companies, the Portfolio may pay substantial
premiums above such investment companies' net asset value per share. The
Portfolio does not intend to invest in other investment companies unless, in the
judgment of SCMI, the potential benefits of such investment justify the payments
of any applicable premiums or sales charges. As a shareholder in an investment
company, the Portfolio would bear its ratable share of the investment company's
expenses, including its advisory and administrative fees. At the same time, the
Portfolio would continue to pay its own fees and expenses.
TEMPORARY DEFENSIVE INVESTMENTS. For temporary defensive purposes, the Portfolio
may invest without limitation in (or enter into repurchase agreements maturing
in seven days or less with banks and broker-dealers with respect to) short-term
debt securities, including commercial paper, U.S. Treasury bills, other
short-term U.S. government securities, certificates of deposit, and bankers'
acceptances of U.S. or foreign banks. The Portfolio also may hold cash and time
deposits denominated in any major foreign currency in foreign banks. To the
extent that the Portfolio assumes a temporary defensive position, it may not be
pursuing its investment objective.
INVESTMENT RISKS
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country and, to the extent that it does so,
is susceptible to a range of factors that could adversely affect that country,
including political and economic developments and foreign exchange rate
fluctuations discussed below. As a result of investing substantially in one
country, the value of the Portfolio's assets may fluctuate more widely than the
value of shares of a comparable fund with a lesser degree of geographic
concentration.
INTERNATIONAL INVESTMENTS. All investments, domestic and foreign, involve risks.
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
While the Portfolio generally invests only in securities of companies and
governments in countries that the investment adviser considers both politically
and economically stable, all foreign investments are subject to risks of foreign
political and economic instability, adverse movements in foreign exchange rates,
the imposition or tightening of exchange controls or other limitations on
repatriation of foreign capital. Foreign investments are subject to the risk of
changes in foreign governmental attitudes towards private investment that could
lead to nationalization, increased taxation or confiscation of Portfolio assets.
Moreover, (1) dividends payable on foreign securities may be subject to foreign
withholding taxes, thereby reducing the income earned by the Portfolio; (2)
commission rates payable on foreign portfolio transactions are generally higher
than in the United States; (3) accounting, auditing and financial reporting
standards differ from those in the United States, which means that less
information about foreign companies may be available than is generally available
about issuers of comparable securities in the United States.; (4) foreign
securities often trade less frequently and with lower volume than U.S.
securities and consequently may exhibit greater price volatility; and (5)
foreign securities trading practices, including those involving securities
settlement, may expose the Portfolio to increased risk in the event of a failed
trade or the insolvency of a foreign broker-dealer or registrar.
REGULATION AND LIQUIDITY OF MARKETS. Government supervision and regulation of
exchanges and brokers in certain foreign countries, including emerging market
countries, is typically less extensive than in the United States. These markets
may have different clearance and settlement procedures, and in certain cases,
settlements have not kept pace with the volume of securities transactions,
making them difficult to conduct. Delays in settlement could adversely affect or
interrupt the Portfolio's intended investment program or result in investment
losses due to intervening declines in security values.
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Securities markets in emerging market countries are substantially smaller than
U.S. securities markets and have substantially lower trading volume, resulting
in diminished liquidity and greater price volatility. Reduced secondary market
liquidity may make it more difficult for the Portfolio to determine the value of
its portfolio securities or dispose of particular instruments when necessary.
Brokerage commissions and other transaction costs on foreign securities
exchanges are also generally higher.
EMERGING MARKETS. Investing in emerging market countries generally presents
greater risk than does other foreign investing. In any emerging market country,
there is the increased possibility of expropriation of assets, confiscatory
taxation, nationalization of companies or industries, foreign exchange controls,
foreign investment controls on daily stock market movements, default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in those countries. In the event of
expropriation, nationalization or other confiscation, the Portfolio could lose
its entire investment in the country involved. The economies of developing
countries are more likely to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. There may also be less monitoring and regulation of emerging markets and
the activities of brokers there. Investing may require that the Portfolio adopt
special procedures, seek local government approvals or take other actions that
may incur costs for the Portfolio.
Certain emerging market countries may restrict investment by foreign investors.
These restrictions or controls may at times limit or preclude investment in
certain securities and may increase the costs and expenses of the Portfolio.
Several emerging market countries have experienced high, and in some periods
extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may adversely affect these countries' economies
and securities markets. Further, inflation accounting rules in some emerging
market countries may indirectly generate losses or profits for certain emerging
market companies.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. The Portfolio invests heavily in
securities denominated in non-U.S. currencies. A decline against the dollar in
the value of currencies in which the Portfolio's investments are denominated
will result in a corresponding decline in the dollar value of its assets. This
risk may be heightened in the case of investing in certain emerging market
countries.
The Portfolio may, at times, have to liquidate portfolio securities in order to
acquire sufficient U.S. dollars to fund redemptions, make distributions or pay
its expenses. Changes in foreign currency exchange rates may contribute to the
need to liquidate portfolio securities. The Portfolio incurs foreign exchange
expenses in converting assets from one currency to another.
DERIVATIVES. The use of derivative instruments exposes the Portfolio to
additional investment risks and transaction costs. Risks inherent in the use of
derivative instruments include: (1) the risk that interest rates, securities
prices and currency markets will not move in the directions that the portfolio
manager anticipates; (2) imperfect correlation between the price of derivative
instruments and movements in the prices of the securities, interest rates or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) inability to
close out certain hedged positions to avoid adverse tax consequences; (5) the
possible absence of a liquid secondary market for any particular instrument and
possible exchange-imposed price fluctuation limits, either of which may make it
difficult or impossible to close out a position when desired; (6) leverage risk,
that is, the risk that adverse price movements in an instrument can result in a
loss substantially greater than the Portfolio's initial investment in that
instrument (in some cases, the potential loss is unlimited); and (7)
particularly in the case of privately negotiated instruments, the risk that the
counterparty will fail to perform its obligations, which could leave the
Portfolio worse off than if it had not entered into the position. Although SCMI
believes that the use of derivative instruments will be beneficial, the
Portfolio's performance could be worse than if the Portfolio had not used such
instruments if the investment adviser's judgment proves incorrect.
DEBT SECURITIES. Debt securities are generally subject to two kinds of risk --
credit risk and market risk. Credit risk refers to the ability of the debtor,
and any other obligor, to pay principal and interest on the debt as it becomes
due. The Portfolio may, from time to time, invest in debt securities with high
risk and high yields (as compared to other debt securities meeting the
Portfolio's investment criteria). The debt securities in which the Portfolio
invests may
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be unrated but will not be in default at the time of purchase. Market risk
refers to the tendency of the value of debt securities to vary inversely with
interest rate changes. Certain debt instruments may also be subject to extension
risk, which refers to change in total return on a debt instrument resulting from
extension or abbreviation of the instrument's maturity.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Portfolio were designed to reduce
its exposure in specific situations. Under these fundamental restrictions, the
Portfolio will not:
BORROWING. As a fundamental policy, the Portfolio may borrow money but will
limit borrowings to amounts not in excess of one third of the value of its total
assets. Borrowing for other than temporary or emergency purposes or meeting
redemption requests is not expected to exceed 5% of the value of the Portfolio's
assets. Certain transactions, such as reverse repurchase agreements, that are
similar to borrowings are not treated as borrowings to the extent that they are
fully collateralized.
DIVERSIFICATION AND CONCENTRATION. The Portfolio is diversified as that term is
defined in the Investment Company Act of 1940 (the "1940 Act"). As a fundamental
policy, with respect to 75% of its assets, the Portfolio may not purchase a
security (other than a U.S. government security or a security of an investment
company) if, as a result: (1) more than 5% of the Portfolio's total assets would
be invested in the securities of a single issuer; or (2) the Portfolio would own
more than 10% of the outstanding voting securities of any single issuer. The
Portfolio may not concentrate its assets in the securities of issuers in any one
industry. As a fundamental policy, the Portfolio may not purchase a security if,
as a result, more than 25% of the value of its total assets would be invested in
the securities of issuers conducting their principal business activities in the
same industry. This limit does not apply to investments in U.S. government
securities, or repurchase agreements covering U.S. government securities.
The percentage restrictions described above and in Part B apply only at the time
of investment and require no action by the Portfolio as a result of subsequent
changes in value of the investments or the size of the Portfolio. A
supplementary list of investment restrictions is contained in Part B.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS. The Portfolio's business and affairs are managed under
the Board's direction. The Board formulates the Trust's and Portfolio's general
policies and meets periodically to review the Portfolio's results, monitor
investment activities and practices and discuss other matters affecting the
Portfolio and the Trust. Additional information regarding the Trustees and
executive officers of the Trust may be found in Part B.
INVESTMENT ADVISER
SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated (doing business
in New York as Schroders Holdings), the wholly owned U.S. holding company
subsidiary of Schroders plc. Schroders plc is the holding company parent of a
large world-wide group of banks and financial services companies.
As investment adviser to the Portfolio, SCMI manages the Portfolio and
continuously reviews, supervises and administers its investments. SCMI is
responsible for making decisions relating to the Portfolio's investments and
placing purchase and sale orders regarding investments with brokers or dealers
it selects. For these services, SCMI is entitled to receive a monthly advisory
fee at the annual rate of 0.50% of the Portfolio's average daily net assets.
SCMI has agreed, however, to waive all or a portion of its advisory fees. Such
fee limitation arrangement shall remain in effect until its elimination is
approved by the Board.
PORTFOLIO TRANSACTIONS. SCMI places orders for the purchase and sale of the
Portfolio's investments with brokers and dealers selected by SCMI in its
discretion and seeks "best execution" of such portfolio transactions. The
Portfolio may pay higher than the lowest available commission rates when SCMI
believes it is reasonable to do so in light of the value of the brokerage and
research services provided by the broker effecting the transaction.
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Commission rates are fixed on many foreign securities exchanges, and this may
cause higher brokerage expenses to accrue to the Portfolio than would be the
case for comparable transactions effected on U.S. securities exchanges.
Subject to the policy of obtaining the best price consistent with quality of
execution on transactions, SCMI may employ: (1) Schroder & Co., Inc. and its
affiliates ("Schroder & Co."), affiliates of SCMI, to effect transactions on the
New York Stock Exchange; and (2) Schroder Securities Limited and its affiliates
("Schroder Securities"), also affiliates of SCMI, to effect transactions of the
Portfolio on certain foreign securities exchanges. Because of the affiliation
between SCMI and both Schroder & Co. and Schroder Securities, the Portfolio's
payment of commissions to them is subject to procedures adopted by the Board
designed to ensure that commissions will not exceed the usual and customary
brokers' commissions. No specific portion of the Portfolio's brokerage will be
directed to Schroder & Co. or Schroder Securities, and in no event will either
receive any brokerage in recognition of research services.
PORTFOLIO MANAGERS. The Portfolio is managed by the investment management team
of Michael Perelstein and Paul Morris (with the assistance of a Schroder
investment committee). Mr. Perelstein has been a Senior Vice President of SCMI
since January 2, 1997. Prior thereto, he was a Managing Director at MacKay
Shields Financial Corporation. Mr. Perelstein has more than twelve years of
international and global investment experience. Mr. Morris has been a Senior
Vice President of SCMI and a Director of Schroder Capital Management Inc. since
January 1997. Prior thereto he was Principal and Senior Portfolio Manager at
Weiss Peck & Greer, L.L.C.; Managing Director (Equity Division) at UBS Asset
Management and Equity Portfolio Manager at Chase Investors Management Corp.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. Schroder Advisors is a wholly owned subsidiary
of SCMI. For its services, Schroder Advisors is entitled to receive an
administration fee at the annual rate of 0.15% of the Portfolio's average daily
net assets. In addition, the Trust has entered into a subadministration
agreement with Forum Administrative Services, LLC ("Forum"), Two Portland
Square, Portland, Maine 04101. For its services, Forum is entitled to receive a
subadministration fee at an annual rate of 0.075% of the Portfolio's average
daily net assets. From time to time, Schroder Advisors or Forum voluntarily may
agree to waive all or a portion of its fees.
RECORDKEEPER AND FUND ACCOUNTANT
Forum Accounting Services, LLC ("Forum Accounting"), Two Portland Square,
Portland, Maine 04101, is the Portfolio's recordkeeper (transfer agent) and fund
accountant. Forum Accounting is an affiliate of Forum. For recordkeeping
services for the Portfolio's Interests, Forum Accounting is entitled to receive
a fee of $12,000 per year. For fund accounting services for the Portfolio, Forum
Accounting is entitled to receive a base fee of $60,000 per year ($36,000 plus
$24,000 for international portfolios) plus additional amounts depending on the
Portfolio's assets, the number and type of securities it holds and its portfolio
turnover rate. From time to time, Forum Accounting voluntarily may agree to
waive all or a portion of its fees.
EXPENSES
The Portfolio is obligated to pay for all of its expenses. These expenses
include: governmental fees; interest charges; taxes; insurance premiums;
investment advisory, custodial, administrative and transfer agency and fund
accounting fees, as described above; compensation of certain of the Trust's
Trustees, costs of membership trade associations; fee and expenses of
independent auditors and legal counsel to the Trust; and expenses of calculating
the net asset value of and the net income of the Portfolio. The Portfolio's
expenses comprise Trust expenses attributable to the Portfolio, which are
allocated to the Portfolio, and expenses not attributable to the Portfolio,
which are allocated among the portfolios in proportion to their average net
assets or as otherwise determined by the Board.
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CUSTODIAN
The Chase Manhattan Bank, through its Global Securities Services division,
located in London, England, acts as custodian of the Portfolio's assets and
employs foreign subcustodians to maintain the Portfolios' foreign assets outside
the U.S.
CAPITAL STOCK AND OTHER SECURITIES
The Trust was organized as a business trust under the laws of the State of
Delaware. Under the Trust Instrument, the Trustees are authorized to issue
Interests in separate series of the Trust. The Trust currently has six
portfolios (one being the Portfolio), and the Trust reserves the right to create
additional portfolios.
Each investor in the Portfolio is entitled to participate equally in the
Portfolio's earnings and assets and 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.
Investments in the Portfolio have no preemptive or conversion rights and are
fully paid and non-assessable, except as set forth below. The Trust is not
required and has no current intention to hold annual meetings of investors, but
the Trust will hold special meetings of investors when in the Trustees' judgment
it is necessary or desirable to submit matters to an investor vote. Generally,
Interests are voted in the aggregate without reference to a particular
portfolio, unless the Trustees determine that the matter affects only one
portfolio or portfolio voting is required, in which case Interests are voted
separately by portfolio. Upon liquidation of the Portfolio, investors will be
entitled to share pro rata in the Portfolio's net assets available for
distribution to investors.
The Portfolio is not required to pay federal income taxes on its ordinary income
and capital gain, as it is treated as a partnership for federal income tax
purposes. All interest, dividends and gain and loss of the Portfolio are deemed
to "pass through" to its investors, regardless of whether such interest,
dividends or gain are distributed by the Portfolio or any loss is realized by
the Portfolio.
Under the Portfolio's operational methods, it is not subject to any income tax.
However, each investor in the Portfolio will be taxed on the investor's
proportionate share (as determined in accordance with the Trust's Trust
Instrument and the Code) of the Portfolio's ordinary income and capital gain, to
the extent that the investor is subject to tax on its income. The Trust will
inform investors of the amount and nature of such income or gain.
PURCHASE OF SECURITIES
Portfolio Interests 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. See "General Description of Registrant" above. All investments are made
without a sales load, at the Portfolio's net asset value next determined after
an order is received. A Subscription Agreement must be completed before the
Portfolio will accept a new interestholder.
Net asset value is calculated as of 4:00 p.m. (Eastern time), Monday through
Friday, on each day that the New York Stock Exchange is open for trading (which
excludes the following national business holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas) ("Portfolio Business Day"). Net asset
value per Interest is calculated by dividing the aggregate value of the
Portfolio's assets less all liabilities by the number of Interests outstanding.
Portfolio securities listed on recognized stock exchanges are valued at the last
reported trade price, prior to the time when the assets are valued, on the
exchange on which the securities are principally traded. Listed securities
traded on recognized stock exchanges where last trade prices are not available
are valued at mid-market prices. Securities traded in over-the-counter markets,
or listed securities for which no trade is reported on the valuation date, are
valued at the most recent reported mid-market price. Other securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith using methods approved by the Board.
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Trading in securities on non-U.S. exchanges and over-the-counter markets may not
take place on every day that the New York Stock Exchange is open for trading.
Furthermore, trading takes place in various foreign markets on days on which the
Portfolio's net asset value is not calculated. If events materially affecting
the value of foreign securities occur between the time when their price is
determined and the time when net asset value is calculated, such securities will
be valued at fair value as determined in good faith by using methods approved by
Board. All assets and liabilities of the Portfolio denominated in foreign
currencies are valued in U.S. dollars based on the exchange rate last quoted by
a major bank prior to the time when the net asset value of the Portfolio is
calculated.
Registered investment companies are subject to no minimum initial or subsequent
investment amount. For other qualified investors, the minimum initial investment
amount is $2 million, and there is no minimum subsequent investment amount.
However, since the Portfolio seeks to be as fully invested at all times as is
reasonably practicable in order to enhance the return on its assets, investments
must be made in federal funds (I.E., monies credited to the account of the
Trust's custodian by a Federal Reserve Bank). Minimum investment amounts may be
waived at the discretion of the Portfolio's investment adviser, SCMI.
Qualified investors who have completed a subscription agreement may transmit
purchase payments by Federal Reserve Bank wire directly to the Portfolio as
follows:
The Chase Manhattan Bank
New York, NY
ABA No.: 021000021
For Credit To: Forum Financial Corp.
Account No.: 910-2-792492
Ref.: Schroder Global Growth Portfolio
Account of: (interestholder name)
Account No: (interestholder account number)
The wire order must specify the name of the Portfolio, the account name and
number, address, confirmation number, amount to be wired, name of the wiring
bank, and name and telephone number of the person to be contacted in connection
with the order. If the initial investment is by wire, an account number is
assigned, and a Subscription Agreement must be completed and mailed to the
Portfolio before any account becomes active. Wire orders received prior to 4:00
p.m. (Eastern time) on each Portfolio day that the New York Stock Exchange is
open for trading (a "Business Day") are processed at the net asset value
determined as of that day. Wire orders received after 4:00 p.m. (Eastern time)
are processed at the net asset value determined as of the next Business Day. The
Trust reserves the right to cease accepting investments in the Portfolio at any
time or to reject any investment order.
Forum Financial Services, Inc., an affiliate of Forum, is the placement agent
for the Trust. The placement agent receives no compensation for its services.
REDEMPTION OR REPURCHASE
An investor may withdraw all or any portion of its investment in the Portfolio
at the net asset value next determined after the investor furnishes a withdrawal
request in proper form to the Trust. Redemption proceeds are paid by the
Portfolio in federal funds normally on the business day after the withdrawal is
effected but, in any event, within seven days. Investments in the Portfolio may
not be transferred. The right of redemption may not be suspended nor the payment
dates postponed for more than seven days except when the New York Stock Exchange
is closed (or when trading on the Exchange is restricted) for any reason other
than its customary weekend or holiday closings or under any emergency or other
circumstances as determined by the Securities and Exchange Commission.
Interests are redeemed at their next determined net asset value after receipt by
the Trust of a redemption request in proper form. Redemption requests may be
made between 9:00 a.m. and 6:00 p.m. (Eastern time) on each Business Day.
Redemption requests that are received prior to 4:00 p.m. (Eastern time) are
processed at the net asset value determined as of that day. Redemption requests
that are received after 4:00 p.m. (Eastern time) are processed at the net asset
value determined on the next Business Day. Redemption requests must include the
name of the
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interestholder, the Portfolio's name, the dollar amount or number of Interests
to be redeemed, interestholder account number, and the signature of the holder
designated on the account.
Written redemption requests may be sent to the Trust at the following address:
Schroder Global Growth Portfolio
P.O. Box 446
Portland, Maine 04112
Telephone redemption requests may be made by telephoning the transfer agent at
(800) 344-8332. A telephone redemption may be made only if the telephone
redemption privilege option has been elected on the Subscription Agreement or
otherwise in writing, and the interestholder has obtained a password from the
transfer agent. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, reasonable procedures will be followed by the transfer
agent to confirm that telephone instructions are genuine. The transfer agent and
the Trust generally will not be liable for any losses due to unauthorized or
fraudulent redemption requests, but either may be liable if it does not follow
these procedures. In times of drastic economic or market change it may be
difficult to make redemptions by telephone. If an interestholder cannot reach
the transfer agent by telephone, redemption requests may be mailed or
hand-delivered to the transfer agent.
Redemption proceeds normally are paid in cash. Redemptions from the Portfolio
may be made wholly or partially in portfolio securities, however, if the Board
determines that payment in cash would be detrimental to the best interests of
the Portfolio. The Trust has filed an election with the Commission pursuant to
which the Portfolio will only consider effecting a redemption in portfolio
securities if the interestholder is redeeming more than $250,000 or 1% of the
Portfolio's net asset value, whichever is less, during any 90-day period.
PENDING LEGAL PROCEEDINGS
Not applicable.
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PART A
(PRIVATE PLACEMENT MEMORANDUM)
SCHRODER CAPITAL FUNDS
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SCHRODER U.S. SMALLER COMPANIES PORTFOLIO
OCTOBER 14, 1997
INTRODUCTION
Schroder Capital Funds (the "Trust") is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The Trust is authorized to offer beneficial interests ("Interests") in separate
series, each with a distinct investment objective and policies (each, a
"portfolio" and collectively, the "portfolios"). The Trust currently offers six
portfolios: Schroder U.S. Smaller Companies Portfolio (the "Portfolio"),
International Equity Fund, Schroder EM Core Portfolio, Schroder Emerging Markets
Fund Institutional Portfolio, Schroder Global Growth Portfolio, and Schroder
International Smaller Companies Portfolio. Additional portfolios may be added in
the future. This Part A relates solely to the Portfolio. Schroder Capital
Management International Inc. ("SCMI") is the Portfolio's investment adviser.
Interests are offered on a no-load basis exclusively to various qualified
investors (including other investment companies) as described under "General
Description of Registrant". Interests of the Trust are not offered publicly and,
accordingly, are not registered under the Securities Act of 1933 (the "1933
Act").
GENERAL DESCRIPTION OF THE TRUST
The Trust was organized as a business trust under the laws of the State of
Delaware on September 7, 1995 under a Trust Instrument dated September 6, 1995.
The Trust has an unlimited number of authorized Interests. The assets of the
Portfolio, and of any other portfolio now existing or created in the future,
belong only to the Portfolio or that other portfolio, as the case may be. The
assets belonging to a portfolio are charged with the liabilities of and all
expenses, costs, charges and reserves attributable to that portfolio. The
Portfolio is classified as "diversified" under the 1940 Act and commenced
operations on or about August 15, 1996.
Interests in the Portfolio are offered 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 be made only by certain qualified
investors (generally excluding S corporations, partnerships, and grantor trusts
beneficially owned by any individuals, S corporations, or partnerships).
Investors may be organized within or outside the U.S. 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.
INVESTMENT OBJECTIVE
The investment objective of the Portfolio is capital appreciation. Current
income is incidental to the objective of capital appreciation. There can be no
assurance that the Portfolio will achieve its investment objective.
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INVESTMENT POLICIES
The Portfolio's investment objective and all fundamental investment policies may
not be changed without approval of the holders of a majority of the Portfolio's
outstanding voting Interests (defined in the same manner as the phrase "vote of
a majority of the outstanding voting securities" is defined in the 1940 Act).
Unless otherwise indicated, all other investment policies are not fundamental
and may be changed by the Trust's Board of Trustees (the "Board") without prior
investor approval. The following specific policies and limitations are
considered at the time of any purchase. Additional investment techniques, risks
and restrictions concerning the Portfolio's investments are described below and
under "Investment Risks" and "Investment Restrictions" in Part A and in Part B.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in equity securities of companies domiciled in the U.S. that at the time
of purchase have market capitalizations of $1.5 billion or less.
Market capitalization means the market value of a company's outstanding stock.
In its investment approach, SCMI seeks to identify securities of companies that
it believes can generate above average earnings growth, and are selling at
favorable prices in relation to book values and earnings. As part of the
investment decision, SCMI's assessment of the competency of an issuer's
management is an important investment consideration. These criteria are not
rigid, and other investments may be included in the Portfolio if they may help
the Portfolio attain its objective. These criteria can be changed by the Board,
without shareholder approval.
The Portfolio invests principally in equity securities, namely, common stocks,
securities convertible into common stocks or, subject to certain limitations,
rights or warrants to subscribe for or purchase common stocks. The Portfolio may
also invest to a limited degree in non-convertible debt securities and preferred
stocks when SCMI believes that such investments are warranted to achieve the
Portfolio's investment objective.
The Portfolio may invest in securities of small, unseasoned companies (which,
together with any predecessors, have been in operation for less than three
years), as well as in securities of more established companies. The Portfolio
currently intends to invest no more than 25% of its total assets in securities
of small, unseasoned issuers.
Although there is no minimum rating for debt securities (convertible or
non-convertible) in which the Portfolio may invest, it is the present intention
of the Portfolio to invest no more than 5% of its net assets in debt securities
rated below "Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB" by
Standard & Poor's ("S&P"), (such securities being commonly known as "high
yield/high risk" securities or "junk bonds"). The Portfolio will not invest in
debt securities that are in default. Prices of high yield/high risk securities
are generally more volatile than prices of higher rated securities, and are
generally deemed more vulnerable to default on interest and principal payments.
It should be noted that even bonds rated "Baa" by Moody's or "BBB" by S&P are
described by those rating agencies as having speculative characteristics and
that changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity of issuers of such bonds to make principal and
interest payments than is the case with higher grade bonds. The Portfolio is not
obligated to dispose of securities due to changes by the rating agencies. (See
"Investment Risks" below and Part B for further information about the risks
associated with investing in junk bonds.)
COMMON AND PREFERRED STOCK AND WARRANTS. The Portfolio may invest in common and
preferred stock. Common stockholders are the owners of the company issuing the
stock and, accordingly, vote on various corporate governance matters such as
mergers. They are not creditors of the company, but rather, upon liquidation of
the company, are entitled to their pro rata share of the company's assets after
creditors (including fixed income security holders) and, if applicable,
preferred stockholders are paid. Preferred stock is a class of stock having a
preference over common stock as to dividends and, generally, as to the recovery
of investment. A preferred stockholder is a shareholder in a company and not a
creditor of the company, as is a holder of the company's fixed income
securities. Dividends paid to common and preferred stockholders are
distributions of the earnings of the company and not interest payments (which
are expenses of the company). Equity securities owned by the Portfolio may be
traded in the over-the counter market or on a securities exchange but may not be
traded every day or in the volume typical of securities traded on a major U.S.
national securities exchange. As a result, disposition by the Portfolio of a
security to meet redemptions by interest holders or otherwise may require the
Portfolio to sell these securities at a
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discount from market prices, to sell during periods when disposition is not
desirable, or to make many small sales over a lengthy period of time. The market
value of all securities, including equity securities, is based upon the market's
perception of value and not necessarily the book value of an issuer or other
objective measure of a company's worth.
The Portfolio may also invest in warrants, which are options to purchase an
equity security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance) and usually during a specified period of time.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. Convertible preferred
stock generally may be converted at a stated price within a specific amount of
time into a specified number of shares of common stock. A convertible security
entitles the holder to receive the dividend paid on preferred stock until the
convertible security is converted or exchanged. Before conversion, convertible
securities have characteristics similar to non-convertible debt securities in
that they ordinarily provide a stream of income with generally higher yields
than those of common stocks of the same or similar issuers. These securities are
usually senior to common stock in a company's capital structure, but are usually
subordinated to non-convertible debt securities. In general, the value of a
convertible security is the higher of its investment value (its value as a fixed
income security) and its conversion value (the value of the underlying shares of
common stock if the security is converted). As a fixed income security, the
value of a convertible security generally increases when interest rates decline
and generally decreases when interest rates rise. The value of a convertible
security is, however, also influenced by the value of the underlying common
stock.
REPURCHASE AGREEMENTS. The Portfolio may invest in repurchase agreements, which
are a means of investing monies for a short period whereby a seller - a U.S.
bank or recognized broker-dealer - sells securities to the Portfolio and agrees
to repurchase them (at the Portfolio's cost plus interest) within a specified
period (normally one day). The values of the underlying securities purchased by
the Portfolio are monitored at all times by SCMI to insure that the total value
of the securities equals or exceeds the value of the repurchase agreement. The
Portfolio's custodian holds the securities until they are repurchased. If a
seller defaults under a repurchase agreement, the Portfolio may have difficulty
exercising its rights to the underlying securities and may incur costs and
experience time delays in disposing of them. To evaluate potential risks, SCMI
reviews the creditworthiness of those banks and dealers with which the Portfolio
enters into repurchase agreements.
ILLIQUID AND RESTRICTED SECURITIES. The Portfolio will not purchase or otherwise
acquire any security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid: (1) by virtue
of the absence of a readily available market; or (2) because of legal or
contractual restrictions on resale ("restricted securities"). There may be
undesirable delays in selling illiquid securities at prices representing their
fair value. Illiquid Investments include over-the-counter options held by the
Portfolio and the portion of the assets used to cover such options. The
limitation on investing in restricted securities does not include securities
that may not be resold to the general public but may be resold (pursuant to Rule
144A under the Securities Act of 1933, as amended) to qualified institutional
purchasers. If SCMI determines that a "Rule 144A security" is liquid pursuant to
guidelines adopted by the Schroder Core Board, the security will not be deemed
illiquid. These guidelines take into account trading activity for the securities
and the availability of reliable pricing information, among other factors. If
there is a lack of trading interest in a particular Rule 144A security, that
security may become illiquid, which could affect the Portfolio's liquidity. See
Part B for further details.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend portfolio securities
(other than in repurchase transactions) to brokers, dealers and other financial
institutions meeting specified credit conditions if the loan is fully
collateralized and if, after any loan, the value of the securities loaned does
not exceed 25% of the value of the Portfolio's total assets. By so doing, the
Portfolio attempts to earn interest income. In the event of the other party's
bankruptcy, the Portfolio could experience delays in recovering the securities
loaned, and potentially, a loss.
The Portfolio may lend securities from its portfolio if liquid assets in an
amount at least equal to the current market value of the securities loaned
(including accrued interest thereon) plus the interest payable to the Portfolio
with
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respect to the loan are maintained as collateral by the Portfolio in a
segregated account. Any securities that the Portfolio receives as collateral
will not become a part of its portfolio at the time of the loan. In the event of
a default by the borrower, the Portfolio will (if permitted by law) dispose of
the collateral except for the part thereof that is a security in which the
Portfolio is permitted to invest. While the securities are on loan, the borrower
will pay the Portfolio any accrued income on those securities, and the Portfolio
may invest the cash collateral and earn income or receive an agreed-upon fee
from a borrower that has delivered cash equivalent collateral. Cash collateral
received by the Portfolio will be invested in U.S. government securities and
liquid high quality obligations. The value of securities loaned is
marked-to-market daily. Portfolio securities purchased with cash collateral are
subject to possible depreciation. Loans of securities by the Portfolio are
subject to termination at the Portfolio's or the borrower's option. The
Portfolio may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Board.
OPTIONS AND FUTURES TRANSACTIONS. While the Portfolio does not presently intend
to do so, it may write covered call options and purchase certain put and call
options, stock index futures, and options on stock index futures and broadly
based stock indices, all of which are referred to as "Hedging Instruments". In
general, the Portfolio may use Hedging Instruments: (1) to attempt to protect
against declines in the market value of the Portfolio's securities; or (2) to
establish a position in the equity markets as a temporary substitute for
purchasing particular equity securities. The Portfolio will not use Hedging
Instruments for speculation. The Hedging Instruments that the Portfolio is
authorized to use have certain risks associated with them, including (a) the
possible failure of such instruments as hedging techniques in cases where the
price movements of the securities underlying the options or futures do not
follow the price movements of the portfolio securities subject to the hedge; (b)
potentially unlimited loss associated with futures transactions and the possible
lack of a liquid secondary market for closing out a futures position; and (c)
possible losses resulting from the inability of SCMI to correctly predict the
direction of stock prices, interests rates and other economic factors. The
Hedging Instruments the Portfolio may use and the risks associated with them are
described in greater detail in Part B.
SHORT SALES AGAINST-THE-BOX. The Portfolio may not sell securities short except
in "short sales against-the-box". For federal income tax purposes, short sales
against-the-box may be made to defer recognition of gain or loss on the sale of
securities "in the box". No income can result and no gain can be realized from
securities sold short against-the-box until the short position is closed out.
See "Short Sales Against-the-Box" in Part B for further details.
OTHER INVESTMENT COMPANIES. Under the 1940 Act, the Portfolio may invest in the
shares of other investment companies which invest in securities that the
Portfolio is permitted to purchase subject to the limits of the 1940 Act or any
orders, rules or regulations thereunder. As a shareholder in an investment
company, the Portfolio would bear its ratable share of the investment company's
expenses, including its advisory and administrative fees. At the same time, the
Portfolio would continue to pay its own fees and expenses.
TEMPORARY DEFENSIVE INVESTMENTS. For temporary defensive purposes, the Portfolio
may invest without limitation in (or enter into repurchase agreements maturing
in seven days or less with U.S. banks and broker-dealers with respect to)
short-term debt securities, including commercial paper, U.S. Treasury bills,
other short-term U.S. government securities, certificates of deposit and
bankers' acceptances of U.S. banks. The Portfolio also may hold cash and time
deposits in U.S. banks. See "Investment Policies" in Part B for further
information about these securities.
INVESTMENT RISKS
SMALLER COMPANIES. While all investments have risks, investments in smaller
capitalization companies carry greater risk than investments in larger
capitalization companies. Smaller capitalization companies generally experience
higher growth rates and higher failure rates than do larger capitalization
companies; and the trading volume of smaller capitalization companies'
securities is normally lower than that of larger capitalization companies and,
consequently, generally has a disproportionate effect on market price (tending
to make prices rise more in response to buying demand and fall more in response
to selling pressure).
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UNSEASONED ISSUERS. Investments in small, unseasoned issuers generally involve
greater risk than is customarily associated with larger, more seasoned
companies. Such issuers often have products and management personnel that have
not been thoroughly tested by time or the marketplace, and their financial
resources may not be as substantial as those of more established companies.
Their securities (which the Portfolio may purchase when they are offered to the
public for the first time) may have a limited trading market which may adversely
affect their sale by the Portfolio and may result in such securities being
priced lower than otherwise might be the case. If other institutional investors
engage in trading this type of security, the Portfolio may be forced to dispose
of its holdings at prices lower than might otherwise be obtained.
HIGH YIELD/HIGH RISK SECURITIES. Debt securities are generally subject to two
kinds of risk -- credit risk and market risk. Credit risk refers to the ability
of the debtor, and any other obligor, to pay principal and interest on the debt
as it becomes due. The Portfolio may, from time to time, invest in debt
securities with high risk and high yields (as compared to other debt securities
meeting the Portfolio's investment criteria). The debt securities in which the
Portfolio invests may be unrated but will not be in default at the time of
purchase. Market risk refers to the tendency of the value of debt securities to
vary inversely with interest rate changes. Certain debt instruments may also be
subject to extension risk, which refers to change in total return on a debt
instrument resulting from extension or abbreviation of the instrument's
maturity. High yield/high risk securities are predominantly speculative with
respect to the capacity to pay interest and repay principal and generally
involve a greater volatility of price than securities in higher rated
categories.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS. The Portfolio's business and affairs are managed under
the Board's direction. The Board formulates the Trust's and Portfolio's general
policies and meets periodically to review the Portfolio's results, monitor
investment activities and practices and discuss other matters affecting the
Portfolio and the Trust. Additional information regarding the Trustees and
executive officers of the Trust may be found in Part B.
INVESTMENT ADVISER
SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated (doing business
in New York as Schroders Holdings), the wholly owned U.S. holding company
subsidiary of Schroders plc. Schroders plc is the holding company parent of a
large world-wide group of banks and financial services companies.
As investment adviser to the Portfolio, SCMI manages the Portfolio and
continuously reviews, supervises and administers its investments. SCMI is
responsible for making decisions relating to the Portfolio's investments and
placing purchase and sale orders regarding investments with brokers or dealers
it selects. For these services, SCMI is entitled to receive a monthly advisory
fee at the annual rate of 0.60% of the Portfolio's average daily net assets.
From time to time, SCMI voluntarily may waive all or a portion of its fees.
PORTFOLIO TRANSACTIONS. SCMI places orders for the purchase and sale of the
Portfolio's investments with brokers and dealers selected by SCMI in its
discretion and seeks "best execution" of such portfolio transactions. The
Portfolio may pay higher than the lowest available commission rates when SCMI
believes it is reasonable to do so in light of the value of the brokerage and
research services provided by the broker effecting the transaction.
Subject to the policy of obtaining the best price consistent with quality of
execution on transactions, SCMI may employ: (1) Schroder & Co. Inc. and its
affiliates ("Schroder & Co."), affiliates of SCMI, to effect transactions on the
New York Stock Exchange; and (2) Schroder Securities Limited and its affiliates
("Schroder Securities"), also affiliates of SCMI, to effect transactions of the
Portfolio, if any, on certain foreign securities exchanges. Because of the
affiliation between SCMI and both Schroder & Co. and Schroder Securities, the
Portfolio's payment of commissions to them is subject to procedures adopted by
the Board designed to ensure that commissions will not exceed the usual and
customary brokers' commissions. No specific portion of the Portfolio's brokerage
will be directed to Schroder & Co. or Schroder Securities, and in no event will
either receive any brokerage in recognition of research services.
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PORTFOLIO MANAGER. Fariba Talebi, a Vice President of the Trust, a Group Vice
President of SCMI and a Director of Schroder Capital Management Inc. with the
assistance of the special small cap investment team, is primarily responsible
for the day-to-day management of the Portfolio's investments and has managed the
Portfolio since its inception. Ms. Talebi has been employed by SCMI in the
investment research and portfolio management areas since 1987.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. Schroder Advisors is a wholly owned subsidiary
of SCMI. For its services, Schroder Advisors is not entitled to receive a
separate fee. In addition, the Trust has entered into a subadministration
agreement with Forum Administrative Services, LLC ("Forum"), Two Portland
Square, Portland, Maine 04101. For its services, Forum is entitled to receive a
subadministration fee at an annual rate of 0.10% of the Portfolio's average
daily net assets. From time to time, Forum voluntarily may agree to waive all or
a portion of its fees.
RECORDKEEPER AND FUND ACCOUNTANT
Forum Financial Corp. ("FFC"), Two Portland Square, Portland, Maine 04101, is
the Portfolio's recordkeeper (transfer agent) and fund accountant. FFC is an
affiliate of Forum. For recordkeeping services for the Portfolio's Interests,
FFC is entitled to receive a fee of $12,000 per year. For fund accounting
services for the Portfolio, FFC is entitled to receive a base fee of $36,000 per
year plus additional amounts depending on the Portfolio's assets, the number and
type of securities it holds and its portfolio turnover rate. From time to time,
FFC voluntarily may agree to waive all or a portion of its fees.
EXPENSES
The Portfolio is obligated to pay for all of its expenses. These expenses
include: governmental fees; interest charges; taxes; insurance premiums;
investment advisory, custodial, administrative and transfer agency and fund
accounting fees, as described above; compensation of certain of the Trust's
Trustees, costs of membership trade associations; fee and expenses of
independent auditors and legal counsel to the Trust; and expenses of calculating
the net asset value of and the net income of the Portfolio. The Portfolio's
expenses comprise Trust expenses attributable to the Portfolio, which are
allocated to the Portfolio, and expenses not attributable to the Portfolio,
which are allocated among the portfolios in proportion to their average net
assets or as otherwise determined by the Board.
CUSTODIAN
The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York 11245, acts
as custodian of the Portfolio's assets.
CAPITAL STOCK AND OTHER SECURITIES
The Trust was organized as a business trust under the laws of the State of
Delaware. Under the Trust Instrument, the Trustees are authorized to issue
Interests in separate series of the Trust. The Trust currently has six
portfolios (one being the Portfolio), and the Trust reserves the right to create
additional portfolios.
Each investor in the Portfolio is entitled to participate equally in the
Portfolio's earnings and assets and 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.
Investments in the Portfolio have no preemptive or conversion rights and are
fully paid and non-assessable, except as set forth below. The Trust is not
required and has no current intention to hold annual meetings of investors, but
the Trust will hold special meetings of investors when in the Trustees' judgment
it is necessary or desirable to submit matters to an investor vote. Generally,
Interests are voted in the aggregate without reference to a particular
portfolio, unless the trustees determine that the matter affects only one
portfolio or portfolio voting is required, in
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which case Interests are voted separately by portfolio. Upon liquidation of the
Portfolio, investors will be entitled to share pro rata in the Portfolio's net
assets available for distribution to investors.
The Portfolio is not required to pay federal income taxes on its ordinary income
and capital gain, as it is treated as a partnership for federal income tax
purposes. All interest, dividends and gain and loss of the Portfolio are deemed
to "pass through" to its investors, regardless of whether such interest,
dividends or gain are distributed by the Portfolio or any loss is realized by
the Portfolio.
Under the Portfolio's operational methods, it is not subject to any income tax.
However, each investor in the Portfolio will be taxed on the investor's
proportionate share (as determined in accordance with the Trust's Trust
Instrument and the Code) of the Portfolio's ordinary income and capital gain, to
the extent that the investor is subject to tax on its income. The Trust will
inform investors of the amount and nature of such income or gain.
PURCHASE OF SECURITIES
Portfolio Interests 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. See "General Description of Registrant" above. All investments are made
without a sales load, at the Portfolio's net asset value next determined after
an order is received. A Subscription Agreement must be completed before the
Portfolio will accept a new interestholder.
Net asset value is calculated as of 4:00 p.m. (Eastern time), Monday through
Friday, on each day that the New York Stock Exchange is open for trading (which
excludes the following national business holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas) ("Portfolio Business Day"). Net asset
value per Interest is calculated by dividing the aggregate value of the
Portfolio's assets less all liabilities by the number of Interests outstanding.
Portfolio securities listed on recognized stock exchanges are valued at the last
reported trade price, prior to the time when the assets are valued, on the
exchange on which the securities are principally traded. Listed securities
traded on recognized stock exchanges where last trade prices are not available
are valued at mid-market prices. Securities traded in over-the-counter markets,
or listed securities for which no trade is reported on the valuation date, are
valued at the most recent reported mid-market price. Other securities and assets
for which market quotations are not readily available are valued at fair value
as determined in good faith using methods approved by the Board.
Registered investment companies are subject to no minimum initial or subsequent
investment amount. For other qualified investors, the minimum initial investment
amount is $2 million, and there is no minimum subsequent investment amount.
However, since the Portfolio seeks to be as fully invested at all times as is
reasonably practicable in order to enhance the return on its assets, investments
must be made in federal funds (I.E., monies credited to the account of the
Trust's custodian by a Federal Reserve Bank). Minimum investment amounts may be
waived at the discretion of the Portfolio's investment adviser, SCMI.
Qualified investors may transmit purchase payments by Federal Reserve Bank wire
directly to the Portfolio as follows:
The Chase Manhattan Bank
New York, NY
ABA No.: 021000021
For Credit To: Forum Financial Corp.
Account No.: 910-2-792588
Ref.: Schroder U.S. Smaller Companies Portfolio
Account of: (interestholder name)
Account No: (interestholder account number)
The wire order must specify the name of the Portfolio, the account name and
number, address, confirmation number, amount to be wired, name of the wiring
bank, and name and telephone number of the person to be contacted in connection
with the order. If the initial investment is by wire, an account number is
assigned, and a
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Subscription Agreement must be completed and mailed to the Portfolio before any
account becomes active. Wire orders received prior to 4:00 p.m. (Eastern time)
on each Portfolio day that the New York Stock Exchange is open for trading (a
"Business Day") are processed at the net asset value determined as of that day.
Wire orders received after 4:00 p.m. (Eastern time) are processed at the net
asset value determined as of the next Business Day. The Trust reserves the right
to cease accepting investments in the Portfolio at any time or to reject any
investment order.
Forum Financial Services, Inc., an affiliate of Forum, is the placement agent
for the Trust. The placement agent receives no compensation for its services.
REDEMPTION OR REPURCHASE
An investor may withdraw all or any portion of its investment in the Portfolio
at the net asset value next determined after the investor furnishes a withdrawal
request in proper form to the Trust. Redemption proceeds are paid by the
Portfolio in federal funds normally on the business day after the withdrawal is
effected but, in any event, within seven days. Investments in the Portfolio may
not be transferred. The right of redemption may not be suspended nor the payment
dates postponed for more than seven days except when the New York Stock Exchange
is closed (or when trading on the Exchange is restricted) for any reason other
than its customary weekend or holiday closings or under any emergency or other
circumstances as determined by the Securities and Exchange Commission.
Interests are redeemed at their next determined net asset value after receipt by
the Trust of a redemption request in proper form. Redemption requests may be
made between 9:00 a.m. and 6:00 p.m. (Eastern time) on each Business Day.
Redemption requests that are received prior to 4:00 p.m. (Eastern time) are
processed at the net asset value determined as of that day. Redemption requests
that are received after 4:00 p.m. (Eastern time) are processed at the net asset
value determined on the next Business Day. Redemption requests must include the
name of the interestholder, the Portfolio's name, the dollar amount or number of
Interests to be redeemed, interestholder account number, and the signature of
the holder designated on the account.
Written redemption requests may be sent to the Trust at the following address:
Schroder U.S. Smaller Companies Portfolio
P.O. Box 446
Portland, Maine 04112
Telephone redemption requests may be made by telephoning the transfer agent at
(800) 344-8332. A telephone redemption may be made only if the telephone
redemption privilege option has been elected on the Subscription Agreement or
otherwise in writing, and the interestholder has obtained a password from the
transfer agent. In an effort to prevent unauthorized or fraudulent redemption
requests by telephone, reasonable procedures will be followed by the transfer
agent to confirm that telephone instructions are genuine. The transfer agent and
the Trust generally will not be liable for any losses due to unauthorized or
fraudulent redemption requests, but either may be liable if it does not follow
these procedures. In times of drastic economic or market change it may be
difficult to make redemptions by telephone. If an interestholder cannot reach
the transfer agent by telephone, redemption requests may be mailed or hand-
delivered to the transfer agent.
Redemption proceeds normally are paid in cash. Redemptions from the Portfolio
may be made wholly or partially in portfolio securities, however, if the Board
determines that payment in cash would be detrimental to the best interests of
the Portfolio. The Trust has filed an election with the Commission pursuant to
which the Portfolio will only consider effecting a redemption in portfolio
securities if the interestholder is redeeming more than $250,000 or 1% of the
Portfolio's net asset value, whichever is less, during any 90-day period.
PENDING LEGAL PROCEEDINGS
Not applicable.
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PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SCHRODER CAPITAL FUNDS
--------
SCHRODER GLOBAL GROWTH PORTFOLIO
OCTOBER 14, 1997
COVER PAGE
- ----------
Not applicable.
TABLE OF CONTENTS
- -----------------
General Information and History........................................ B-1
Investment Objectives and Policies..................................... B-1
Management of the Trust................................................ B-15
Control Persons and Principal Holders of Securities.................... B-17
Investment Advisory and Other Services................................. B-17
Brokerage Allocation and Other Practices............................... B-19
Capital Stock and Other Securities..................................... B-21
Purchase, Redemption and Pricing of Securities......................... B-21
Tax Status............................................................. B-21
Underwriters........................................................... B-23
Calculations of Performance Data....................................... B-23
Financial Statements................................................... B-23
GENERAL INFORMATION AND HISTORY
Not applicable.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES
INTRODUCTION
Part A contains information about the investment objectives, policies and
restrictions of Schroder Global Growth Portfolio (the "Portfolio"), a series of
Schroder Capital Funds (the "Trust"). The following discussion is intended to
supplement the disclosure in Part A concerning the Portfolio's investments,
investment techniques and strategies and the risks associated therewith. This
Part B should be read only in conjunction with Part A.
DEFINITIONS
As used in Part B, the following terms shall have the meanings listed:
"Board" shall mean the Board of Trustees of the Trust.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
"Commission" shall mean the U.S. Securities and Exchange Commission.
<PAGE>
FOREIGN SECURITIES
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
There may be less publicly available information about foreign issuers than is
available for U.S. issuers, and foreign auditing, accounting and financial
reporting practices may differ from U.S. practices. Foreign securities markets
may be less active than U.S. markets, trading may be thin and consequently
securities prices may be more volatile. The Portfolio's investment adviser,
Schroder Capital Management International, Inc. ("SCMI" or "Adviser") will, in
general, invest only in securities of companies and governments of countries
which, in its judgment, are both politically and economically stable. All
foreign investments are subject to risks of foreign political and economic
instability, adverse movements in foreign exchange rates, the imposition or
tightening of exchange controls or other limitations on the repatriation of
foreign capital and changes in foreign governmental attitudes toward private
investment, possibly leading to nationalization, increased taxation, or
confiscation of Portfolio assets.
DEPOSITORY RECEIPTS
Investments in securities of foreign issuers may on occasion be in the form of
sponsored or unsponsored American Depository Receipts ("ADRs") or European
Depository Receipts ("EDRs"), or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued in the United States by a bank or
trust company, evidencing ownership of the underlying securities. EDRs are
typically issued in Europe under a similar arrangement. Generally, ADRs, in
registered form, are designed for use in the U.S. securities markets and EDRs,
in bearer form, are designed for use in European securities markets. Unsponsored
ADRs may be created without the participation of the foreign issuer. Holders of
these ADRs generally bear all the costs of the ADR facility, whereas foreign
issuers typically bear certain costs in a sponsored ADR. The bank or trust
company depository of an unsponsored ADR may be under no obligation to
distribute shareholder communications received from the foreign issuer or to
pass through voting rights.
USE OF FORWARD CONTRACTS IN FOREIGN EXCHANGE TRANSACTIONS
To protect or "hedge" against adverse movements in foreign currency exchange
rates, the Portfolio may invest in forward contracts to purchase or sell an
agreed-upon amount of a specified currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. Such contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the currency which is sold, they expose the Portfolio to the risk
that the counterparty is unable to perform and they tend to limit commensurately
any potential gain which might result should the value of such currency increase
during the contract period.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government or its agencies, instrumentalities or government-sponsored
enterprises that have remaining maturates not exceeding one year. Agencies and
instrumentalities that issue or guarantee debt securities and have been
established or sponsored by the U.S. Government include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Federal Land Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the Student Loan
Marketing Association. Except for obligations issued by the U.S. Treasury and
the Government National Mortgage Association, none of the obligations of the
other agencies, instrumentalities or government-sponsored enterprises referred
to above are backed by the full faith and credit of the U.S. Government. There
can be no assurance that the U.S. Government will provide financial support to
these obligations if it is not obligated to do so.
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REPURCHASE AGREEMENTS
The Portfolio may invest in securities subject to repurchase agreements that
mature or may be terminated by notice in seven days or less with U.S. banks or
broker-dealers. In a typical repurchase agreement the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. The repurchase price exceeds the
sale price, reflecting an agreed-upon interest rate effective for the period the
buyer owns the security subject to repurchase. The agreed-upon rate is unrelated
to the interest rate on that security. SCMI monitors the value of the underlying
security at the time the transaction is entered into and at all times during the
term of the repurchase agreement to insure that the value of the security always
equals or exceeds the repurchase price. In the event of default by the seller
under the repurchase agreement, the Portfolio may have difficulties in
exercising its rights to the underlying securities and may incur costs and
experience time delays in connection with the disposition of such securities. To
evaluate potential risks, SCMI reviews the credit-worthiness of those banks and
dealers with which the Portfolio enters into repurchase agreements.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To hedge against adverse price movements in the securities held in its portfolio
and the currencies in which they are denominated (as well as in the securities
it might wish to purchase and their denominated currencies), the Portfolio may
engage in transactions in forward foreign currency exchange contracts.
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell a currency at a future date (which may be any
fixed number of days from the date of the contract agreed upon by the parties)
at a price set at the time of the contract. The Portfolio may enter into forward
contracts as a hedge against fluctuations in future foreign exchange rates.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in many emerging market countries or to securities of
issuers domiciled or principally engaged in business in emerging market
countries. This may limit the Portfolio's ability to hedge its investments
effectively in those emerging markets. Hedging against a decline in the value of
a currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Such transactions
also limit the opportunity for gain if the value of the hedged currencies should
rise. In addition, it may not be possible for the Portfolio to hedge against a
devaluation that is so generally anticipated that the Portfolio is not able to
contract to sell the currency at a price above the devaluation level it
anticipates.
The Portfolio will enter into forward contracts under certain instances. When
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, wish to secure the price
of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale (for a fixed amount of dollars or other
currency) of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against possible loss
(resulting from adverse changes in the relationship between the U.S. dollar or
other currency being used for the security purchase and the foreign currency in
which the security is denominated) during the period between the date on which
the security is purchased or sold and the date on which payment is made or
received. In addition, when the Portfolio anticipates purchasing securities at
some future date, and wishes to secure the current exchange rate of the currency
in which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to part or all of the value of the anticipated purchase, for a
fixed amount of U.S. dollars or other currency.
In all of the above instances, if the currency in which the Portfolio's
portfolio securities (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased, then the
Portfolio will have realized fewer gains than if the Portfolio had not entered
into the forward contracts. Furthermore, the precise matching of the forward
contract amounts and the value of the securities involved is not generally
possible, since the future value of such securities in foreign currencies
changes as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it matures.
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To the extent that the Portfolio enters into forward contracts to hedge against
a decline in the value of portfolio holdings denominated in a particular foreign
currency resulting from currency fluctuations, there is a risk that the
Portfolio may nevertheless realize a gain or loss as a result of currency
fluctuations after such portfolio holdings are sold should the Portfolio be
unable to enter into an "offsetting" forward foreign currency contract with the
same party or another party. The Portfolio may be limited in its ability to
enter into hedging transactions involving forward contracts by the Internal
Revenue Code requirements relating to qualifications as a regulated investment
company (see "Taxation").
The Portfolio is not required to enter into such transactions with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Adviser. Generally, the Portfolio will not enter into a
forward contract with a term of greater than one year.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in Part A, the Portfolio may write covered call options against
securities held in its portfolio and covered put options on eligible portfolio
securities and may purchase options of the same series to effect closing
transactions, and may hedge against potential changes in the market value of its
investments (or anticipated investments), by purchasing put and call options on
portfolio (or eligible portfolio) securities (and the currencies in which they
are denominated) and engaging in transactions involving futures contracts and
options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on various
foreign currencies are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC Options"). Listed options
are issued or guaranteed by the exchange on which they trade or by a clearing
corporation such as the Options Clearing Corporation ("OCC"). Ownership of a
listed call option gives the Portfolio the right to buy from the OCC (in the
U.S.) or other clearing corporation or exchange, the underlying security or
currency covered by the option at the stated exercise price (the price per unit
of the underlying security or currency) by filing an exercise notice prior to
the expiration date of the option. The writer (seller) of the option would then
have the obligation to sell, to the OCC (in the U.S.) or other clearing
corporation or exchange, the underlying security or currency at that exercise
price prior to the expiration date of the option, regardless of its then current
market price. Ownership of a listed put option would give the Portfolio the
right to sell the underlying security or currency to the OCC (in the U.S.) or
other clearing corporation or exchange at the stated exercise price. Upon notice
of exercise of the put option, the writer of the option would have the
obligation to purchase the underlying security or currency from the OCC (in the
U.S.) or other clearing corporation or exchange at the exercise price.
The OCC or other clearing corporation or exchange that issues listed options
ensures that all transactions in such options are properly executed. OTC options
are purchased from or sold (written) to dealers or financial institutions that
have entered into direct agreements with the Portfolio. With OTC options,
variables such as expiration date, exercise price and premium are agreed between
the Portfolio and the transacting dealer. If the transacting dealer fails to
make or take delivery of the securities or amount of foreign currency underlying
an option it has written, the Portfolio would lose the premium paid for the
option as well as any anticipated benefit of the transaction. The Portfolio will
engage in OTC option transactions only with member banks of the Federal Reserve
System or primary dealers in U.S. Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities that are
denominated in a foreign currency, the Portfolio may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Portfolio would be able to sell the
foreign currency for a fixed amount of U.S. dollars, thereby securing the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Portfolio may purchase call options on foreign
currencies in which securities it anticipates purchasing are denominated to
secure a set U.S. dollar price for such securities and protect against a
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decline in the value of the U.S. dollar against such foreign currency. The
Portfolio may also purchase call and put options to close out written option
positions.
The Portfolio also may write covered call options on foreign currency to protect
against potential declines in its portfolio securities that are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Portfolio also may write
options to close out long call option positions. A covered put option on a
foreign currency would be written by the Portfolio for the same reason it would
purchase a call option, namely, to hedge against an increase in the U.S. dollar
value of a foreign security that the Portfolio anticipates purchasing. In this
case, the receipt of the premium would offset, to the extent of the size of the
premium, any increased cost to the Portfolio resulting from an increase in the
U.S. dollar value of the foreign security. However, the Portfolio could not
benefit from any decline in the cost of the foreign security that is greater
than the price of the premium received. The Portfolio also may write options to
close out long put option positions.
Markets in foreign currency options are relatively new, and the Portfolio's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Portfolio will not
purchase or write such options unless and until, in the opinion of the SCMI, the
market for them has developed sufficiently to ensure that their risks are not
greater than the risks in connection with the underlying currency. There can be
no assurance that a liquid secondary market will exist for a particular option
at any specific time. In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar, with the result that the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and, thus, may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that are not reflected in the options market.
COVERED CALL WRITING. The Portfolio is permitted to write covered call options
on portfolio securities, and on the U.S. dollar and foreign currencies in which
they are denominated, without limit. Generally, a call option is "covered" if
the Portfolio owns (or has the right to acquire without additional cash
consideration (or for additional cash consideration held for the Portfolio by
its custodian in a segregated account) the underlying security (currency)
subject to the option. In the case of call options on U.S. Treasury Bills,
however, the Portfolio might own U.S. Treasury Bills of a different series from
those underlying the call option, but with a principal amount and value
corresponding to the exercise price and a maturity date no later than that of
the security (currency) deliverable under the call option. A call option is also
covered if the Portfolio holds a call on the same security as the underlying
security (currency) of the written option, where the exercise price of the call
used for coverage is equal to or less than the exercise price of the call or
greater than the exercise price of the call written if the mark-to-market
difference is maintained by the Portfolio in cash, U.S. Government securities or
other high-grade debt obligations held by the Portfolio in a segregated account
maintained with its custodian.
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The Portfolio receives a premium from the purchaser in return for a call it has
written. Receipt of such premiums may enable the Portfolio to earn a higher
level of current income than it would earn from holding the underlying
securities (currencies) alone. Moreover, the premium received offsets a portion
of the potential loss incurred by the Portfolio if the securities (currencies)
underlying the option are ultimately sold (exchanged) by the Portfolio at a
loss. Furthermore, a premium received on a call written on a foreign currency
ameliorates any potential loss of value on the portfolio security due to a
decline in the value of the currency. However, during the option period, the
covered call writer has, in return for the premium, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security (or the exchange rate of the currency in which it is
denominated) increase but has retained the risk of loss should the price of the
underlying security (or the exchange rate of the currency in which it is
denominated) decline. The premium received fluctuates with varying economic
market conditions. If the market value of the portfolio securities (or the
currencies in which they are denominated) upon which call options have been
written increases, the Portfolio may receive a lower total return from the
portion of its portfolio upon which calls have been written than it would have
had such calls not been written.
With respect to listed options and certain OTC options, during the option period
the Portfolio may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation terminates upon the expiration of the option
period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Portfolio has been assigned an exercise notice, the Portfolio is unable to
effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable the Portfolio to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain resulting
from a closing purchase transaction could be offset in whole or in part or
exceeded by a decline in the market value of the underlying security (currency).
If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised, the
Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received on the option less the commission paid.
Options written by the Portfolio normally have expiration dates of up to
eighteen months from the date written. The exercised price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. As a writer of a covered put option, the Portfolio would
incur an obligation to buy the security underlying the option from the purchaser
of the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed and OTC put options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A put
is "covered" if at all times the Portfolio maintains with its custodian (in a
segregated account) cash, U.S. Government securities or other high-grade
obligations in an amount equal to at least the exercise price of the option.
Similarly, a short put position could be covered by the Portfolio by its
purchase of a put option on the same security (currency) as the underlying
security of the written option, where the exercise price of the purchased option
is equal to or more than the exercise price of the put written or less than the
exercise price of the put written if the marked to market difference is
maintained by the Portfolio in cash, U.S. Government securities or other
high-grade debt obligations which the Portfolio holds in a segregated
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account maintained at its custodian. In writing puts, the Portfolio assumes the
risk of loss should the market value of the underlying security (currency)
decline below the exercise price of the option (any loss being decreased by the
receipt of the premium on the option written). In the case of listed options,
during the option period the Portfolio may be required, at any time, to make
payment of the exercise price against delivery of the underlying security
(currency). The operation of and limitations on covered put options in other
respects are substantially identical to those of call options.
The Portfolio may write put options for three purposes: (1) to receive the
income derived from the premiums paid by purchasers; (2) when the investment
adviser wishes to purchase the security (or a security denominated in the
currency underlying the option) underlying the option at a price lower than its
current market price (in which case it will write the covered put at an exercise
price reflecting the lower purchase price sought); and (3) to close out a long
put option position. The potential gain on a covered put option is limited to
the premium received on the option (less the commissions paid on the
transaction) while the potential loss equals the differences between the
exercise price of the option and the current market price of the underlying
securities (currencies) when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Portfolio may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The Portfolio
may purchase a call option in order to close out a covered call position (see
"Covered Call Writing" above), to protect against an increase in price of a
security it anticipates purchasing or, in the case of a call option on foreign
currency, to hedge against an adverse exchange rate move of the currency in
which the security it anticipates purchasing is denominated vis-a-vis the
currency in which the exercise price is denominated. The purchase of the call
option to effect a closing transaction on a call written over-the-counter may be
a listed or an OTC option. In either case, the call purchased is likely to be on
the same securities (currencies) and have the same terms as the written option.
If purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by the
Portfolio.
The Portfolio may purchase put options on securities (currencies) that it holds
in its portfolio to protect itself against a decline in the value of the
security and to close out written put option positions. If the value of the
underlying security (currency) were to fall below the exercise price of the put
purchased in an amount greater then the premium paid for the option, the
Portfolio would incur no additional loss. In addition, the Portfolio may sell a
put option it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would result in a net gain or
loss depending upon whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option that is sold. Any
such gain or loss could be offset in whole or in part by a change in the market
value of the underlying security (currency). If a put option purchased by the
Portfolio expired without being sold or exercised, the premium would be lost.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call writer
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price if the market price of the
underlying security (or the value of its denominated currency) increases but has
retained the risk of loss if the price of the underlying security (or the value
of its denominated currency) declines. The writer has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. If a covered call option
writer is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option, it cannot sell the underlying security until the option
expires or the option is exercised. Accordingly, a covered call option writer
may not be able to sell an underlying security at a time when it might otherwise
be advantageous to do so. A covered put option writer who is unable to effect a
closing purchase transaction or to purchase an offsetting OTC option would
continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade short-term obligations as security for the put option for other
investment purposes until the exercise or expiration of the option.
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The Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, since such options will generally only be closed out by entering
into a closing purchase transaction with the purchasing dealer. However, the
Portfolio may be able to purchase an offsetting option that does not close out
its position as a writer but constitutes an asset of equal value to the
obligation under the option written. If the Portfolio is not able to either
enter into a closing purchase transaction or purchase an offsetting position, it
will be required to maintain the securities subject to the call, or the
collateral underlying the put, even though it might not be advantageous to do
so, until a closing transaction can be entered into (or the option is exercised
or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (1) insufficient trading interest in certain options; (2)
restrictions on transactions imposed by an exchange; (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (4) interruption of the normal
operations on an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions will be entered into by the Portfolio only with brokers
or financial institutions deemed creditworthy by SCMI.
Exchanges have established limitations governing the maximum number of options
on the same underlying security or futures contract (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. If the option markets close before the markets
for the underlying securities, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
The extent to which the Portfolio may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company and the Portfolio's intention to qualify as such
(see "Taxation").
FUTURES CONTRACTS. The Portfolio may purchase and sell interest rate, currency,
and index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges, on such underlying securities as U.S. Treasury
bonds, notes and bills, and/or any foreign government fixed-income security
("interest rate futures contracts"), on various currencies ("currency futures
contracts") and on such indices of U.S. and foreign securities as may exist or
come into being ("index futures contracts").
The Portfolio may purchase or sell interest rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If the investment adviser anticipates that interest rates may rise and,
concomitantly, that the price of certain of its portfolio securities fall, the
Portfolio may sell an interest rate futures contract. If declining interest
rates are anticipated, the Portfolio may purchase an interest rate futures
contract to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts.
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The Portfolio may purchase or sell currency futures contracts on currencies in
which its portfolio securities (or anticipated portfolio securities) are
denominated for the purposes of hedging against anticipated changes in currency
exchange rates. The Portfolio may enter into currency futures contracts for the
same reasons as set forth above for entering into forward foreign currency
exchange contracts; namely, to secure the value of a security purchased or sold
in a given currency vis-a-vis a different currency or to hedge against an
adverse currency exchange rate movement of a portfolio security's (or
anticipated portfolio security's) denominated currency vis-a-vis a different
currency.
The Portfolio may purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices. If it anticipates that the prices of securities
it holds may fall, the Portfolio may sell an index futures contract. Conversely,
if the Portfolio wishes to hedge against anticipated price rises in those
securities which it intends to purchase, the Portfolio may purchase an index
futures contract.
In addition to the above, interest rate, currency and index futures contracts
will be bought or sold in order to close out short or long positions maintained
by the Portfolio in corresponding futures contracts.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without making or taking delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Portfolio will be able to enter into a
closing transaction.
INTEREST RATE FUTURES CONTRACTS. When the Portfolio enters into an interest rate
futures contract, it is initially required to deposit with the Portfolio's
custodian (in a segregated account in the name of the broker performing the
transaction) an "initial margin" of cash or U.S. Government securities or other
high grade short-term obligations equal to approximately 2% of the contract
amount. Initial margin requirements are established by the exchanges on which
futures contracts trade and may 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 money by a
brokers' client but is, rather, a good faith deposit on the futures contract
that will be returned to the Portfolio 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 with the Portfolio's
futures contract clearing broker of cash or U.S. Government securities (called
"variation margin") that are reflective of price fluctuations in the futures
contract.
CURRENCY FUTURES CONTRACTS. Generally, foreign currency futures contracts
provide for the delivery of a specified amount of a given currency, on the
exercise date, for a set exercise price denominated in U.S. dollars or other
currency. Foreign currency futures contracts would be entered into for the same
reason and under the same circumstances as forward foreign currency exchange
contracts. SCMI assesses such factors as cost spreads, liquidity and transaction
costs in determining whether to use futures contracts or forward contracts in
its foreign currency transactions and hedging strategy.
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Purchasers and sellers of foreign currency futures contracts are subject to the
same risks that apply generally to the buying and selling of futures contracts.
In addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
that are assessed in the issuing country.
INDEX FUTURES CONTRACTS. The Portfolio may invest in index futures contracts. An
index futures contract sale creates an obligation by the Portfolio, as seller,
to deliver cash at a specified future time. An index futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
cash at a specified future time. Futures contracts on indices do not require the
physical delivery of securities but provide for a final cash settlement on the
expiration date that reflects accumulated profits and losses credited or debited
to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. In addition, due to current
industry practice, daily variations in gains and losses on open contracts are
required to be reflected in cash in the form of variation margin payments. The
Portfolio may be required to make additional margin payments during the term of
the contract.
At any time prior to expiration of the futures contract, the Portfolio may elect
to close the position by taking an opposite position, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash may be required
to be paid by or released to the Portfolio and the Portfolio realizes a loss or
gain.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write call and put
options on futures contracts traded on an exchange and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the position in the futures contract by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in case of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract.
The Portfolio may purchase and write options on futures contracts for purposes
identical to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the investment
adviser wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge. Any premiums received in the writing of
options on futures contracts may provide a further hedge against losses
resulting from price declines in portions of the Portfolio's investment
portfolio.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the Portfolio
will not purchase or write options on foreign currency futures contracts unless
and until, in SCMI's opinion, the market for such options has developed
sufficiently that the risks in connection with them are not greater than the
risks in connection with transactions in the underlying foreign currency futures
contracts.
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LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio
may not enter into futures contracts or purchase related options thereon if,
immediately thereafter, the amount committed to margin plus the amount paid for
premiums for unexpired options on futures contracts exceeds 5% of the value of
the Portfolio's total assets, after taking into account unrealized gains and
unrealized losses on such contracts it has entered into, provided, however, that
in the case of an option that is in-the-money (the exercise price of the call
(put) option is less (more) than the market price of the underlying security) at
the time of purchase, the in-the-money amount may be excluded in calculating the
5%. However, there is no overall limitation on the percentage of the Portfolio's
assets that may be subject to a hedge position. In addition, in accordance with
the regulations of the Commodity Futures Trading Commission ("CFTC") under which
the Portfolio is exempted from registration as a commodity pool operator, the
Portfolio may only enter into futures contracts and options on futures contracts
transactions for purposes of hedging a part or all of its portfolio. Except as
described above, there are no other limitations on the use of futures and
options thereon by the Portfolio.
The writer of an option on a futures contract is required to deposit initial and
variation margin pursuant to requirements similar to those applicable to futures
contracts. Premiums received from the writing of an option on a futures contract
are included in initial margin deposits.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio
may sell a futures contract to protect against the decline in the value of
securities (or the currency in which they are denominated) held by the
Portfolio. However, it is possible that the futures market may advance and the
value of the Portfolio's securities (or the currency in which they are
denominated) may decline. If this occurs, the Portfolio will lose money on the
futures contract and also experience a decline in value of its portfolio
securities. While this might occur for only a very brief period or to a very
small degree, over time the value of a diversified portfolio will tend to move
in the same direction as the futures contracts.
If the Portfolio purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated) and the value of such securities (currencies) decreases, then the
Portfolio may determine not to invest in the securities as planned and will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities.
Exchanges 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, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures contract positions. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
contract positions could also have an adverse impact on the Portfolio's ability
to effectively hedge its portfolio.
Futures contracts and options thereon that are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges, and brokerage
commissions, clearing costs and other transaction costs may be higher. Greater
margin requirements may limit the Portfolio's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may cause delays in the
settlement of the Portfolio's foreign exchange transactions.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in futures or options thereon, the Portfolio could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC option
purchased by the Portfolio, the Portfolio could experience a loss of all or part
of the value of the option. Transactions are entered into by the Portfolio only
with brokers or financial institutions deemed creditworthy by SCMI.
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While the futures contracts and options transactions in which the Portfolio
engages for the purpose of hedging its portfolio securities are not speculative
in nature, there are risks inherent in the use of such instruments. One such
risk that may arise in employing futures contracts to protect against the price
volatility of portfolio securities (and the currencies in which they are
denominated) is that the prices of securities and indices subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Portfolio's portfolio securities
(and the currencies in which they are denominated). Another such risk is that
prices of interest rate futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Portfolio seeks a hedge.
A correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and are expected to diminish as the contract
approaches maturity.
There may exist an imperfect correlation between the price movements of futures
contracts purchased by the Portfolio and the movements in the prices of the
securities (currencies) which are the subject of the hedge. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationship between the debt securities or currency markets and futures
markets could result. Price distortions could also result if investors in
futures contracts choose to make or take delivery of underlying securities
rather than engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, because the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market can be
anticipated with the resulting speculation causing temporary price distortions.
Due to the possibility of price distortions in the futures contracts market and
because of the imperfect correlation between movements in the prices of
securities and movements in the prices of futures contracts, a correct forecast
of interest rate trends may still not result in a successful hedging
transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Portfolio may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin. In
addition, limitations imposed by an exchange or board of trade on which futures
contracts are traded may compel the Portfolio to or prevent it from closing out
a contract, which may result in reduced gain or increased loss to the Portfolio.
The absence of a liquid market in futures contracts might cause the Portfolio to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
The extent to which the Portfolio may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the
Portfolio's intention to qualify as such (see "Taxation").
WARRANTS AND STOCK RIGHTS. The Portfolio may invest in warrants, which are
options to purchase an equity security at a specified price (usually
representing a premium over the applicable market value of the underlying equity
security at the time of the warrant's issuance). Investments in warrants involve
certain risks, including the possible lack of a liquid market for the resale of
the warrants, potential price fluctuations as a result of speculation or other
factors and failure of the price of the underlying security to reach a level at
which the warrant can be prudently exercised (in which case the warrant may
expire without being exercised, resulting in the loss of the Portfolio's entire
investment therein). The prices of warrants do not necessarily move parallel to
the prices of the underlying securities. Warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
In addition, the Portfolio may invest up to 5% of its assets (at the time of
investment) in stock rights. A stock right is an option given to a shareholder
to buy additional shares at a predetermined price during a specified time
period.
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INVESTMENT RESTRICTIONS
The following investment restrictions restate or are in addition to those
described under "Investment Restrictions" and "Investment Policies" in Part A.
These restrictions, unless otherwise indicated, are fundamental policies of the
Portfolio and cannot be changed without the vote of a "majority" of the
Portfolio's outstanding Interests. Under the Investment Company Act of 1940, as
amended ("1940 Act"), such a "majority" vote is defined as the vote of the
holders of the lesser of: (1) 67% of more of the shares present or represented
by proxy at a meeting of shareholders, if the holders of more than 50% of the
outstanding shares are present; or (2) more than 50% of the outstanding shares.
Under these additional restrictions, the Portfolio will not:
1. DIVERSIFICATION
with respect to 75% of its assets, purchase a
security (other than a U.S. government security or a security
of an investment company) if, as a result: (1) more than 5% of
the Portfolio's total assets would be invested in the
securities of a single issuer; or (2) the Portfolio would own
more than 10% of the outstanding voting securities of any
single issuer.
2. INDUSTRY CONCENTRATION
purchase a security if, as a result, more than 25% of
the Portfolio's total assets would be invested in securities
of issuers conducting their principal business activities in
the same industry. For purposes of this limitation, there is
no limit on: (1) investments in U.S. government securities,
in repurchase agreements covering U.S. government
securities, in securities issued by the states, territories
or possessions of the United States ("municipal securities")
or in foreign government securities; or (2) investment in
issuers domiciled in a single jurisdiction. Notwithstanding
anything to the contrary, to the extent permitted by the
1940 Act, each Portfolio may invest in one or more
investment companies; provided that, except to the extent
the Portfolio invests in other investment companies pursuant
to Section 12(d)(1)(A) of the 1940 Act, the Portfolio treats
the assets of the investment companies in which it invests
as its own for purposes of this policy.
3. BORROWING
borrow money if, as a result, outstanding borrowings
would exceed an amount equal to one third of the Portfolio's
total assets.
4. REAL ESTATE
purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the Portfolio from investing in
securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
5. LENDING
make loans to other parties. For purposes of this
limitation, entering into repurchase agreements, lending
securities and acquiring any debt security are not deemed to
be the making of loans.
6. COMMODITIES
purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments
(but this shall not prevent the Portfolio from purchasing or
selling options and futures contracts or from investing in
securities or other instruments backed by physical
commodities).
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7. UNDERWRITING
underwrite (as that term is defined in the Securities
Act of 1933, as amended) securities issued by other persons
except, to the extent that in connection with the disposition
of the Portfolio's assets, the Portfolio may be deemed to be
an underwriter.
8. SENIOR SECURITIES
issue any class of senior securities except to the
extent consistent with 1940 Act.
NONFUNDAMENTAL LIMITATIONS
The Portfolio has adopted the following nonfundamental investment limitations. A
nonfundamental policy does not override a fundamental limitation. The policies
of the Portfolio may be changed by the Board without shareholder approval.
1. BORROWING
for purposes of the limitation on borrowing, the
following are not treated as borrowings to the extent they
are fully collateralized: (1) the delayed delivery of
purchased securities (such as the purchase of when-issued
securities); (2) reverse repurchase agreements; (3)
dollar-roll transactions; and (5) the lending of securities
("leverage transactions"). (See fundamental Limitation No. 3
"Borrowing" above.
2. LIQUIDITY
invest more than 15% of its net assets in: (1)
securities that cannot be disposed of within seven days at
their then-current value; (2) repurchase agreements not
entitling the holder to payment of principal within seven
days; and (3) securities subject to restrictions on the sale
of the securities to the public without registration under the
1933 Act ("restricted securities") that are not readily
marketable. Each Portfolio may treat certain restricted
securities as liquid pursuant to guidelines adopted by the
Board.
3. EXERCISING CONTROL OF ISSUERS
make investments for the purpose of exercising
control of an issuer. Investments by a Portfolio in entities
created under the laws of foreign countries solely to
facilitate investment in securities in that country will not
be deemed the making of investments for the purpose of
exercising control.
4. OTHER INVESTMENT COMPANIES
invest in securities of another investment company,
except to the extent permitted by the 1940 Act.
5. SHORT SALES AND PURCHASING ON MARGIN
sell securities short, unless it owns or has the
right to obtain securities equivalent in kind and amount to
the securities sold short (short sales "against the box"), and
provided that transactions in futures contracts and options
are not deemed to constitute selling securities short.
purchase securities on margin, except that a
Portfolio may use short-term credit for the clearance of the
Portfolio's transactions, and provided that initial and
variation margin payments
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<PAGE>
in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on
margin.
6. LENDING
lend a security if, as a result, the amount of loaned
securities would exceed an amount equal to one third of the
Portfolio's total assets.
MANAGEMENT OF THE TRUST
The following information relates to the principal occupations of each Trustee
and executive officer of the Trust during the past five years and shows the
nature of any affiliation with SCMI. Each of these individuals currently serves
in the same capacity for Schroder Capital Funds (Delaware), an investment
company with series that invests all of their assets in the Portfolio or other
portfolios of the Trust, and for Schroder Capital Funds II, a registered
investment company.
PETER E. GUERNSEY, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Insurance Consultant since August 1986; prior thereto
Senior Vice President, Marsh & McLennan, Inc., insurance brokers.
JOHN I. HOWELL, 80, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Private Consultant since February 1987; Honorary Director,
American International Group, Inc.; Director, American International Life
Assurance Company of New York.
CLARENCE F. MICHALIS, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy, Jr.
Foundation (charitable foundation).
HERMANN C. SCHWAB, 77, c/o the Trust, Two Portland Square, Portland, Maine -
Chairman and Trustee of the Trust; retired since March, 1988; prior thereto,
consultant to SCMI since February 1, 1984.
MARK J. SMITH*, 35, 33 Gutter Lane, London, England - President and Trustee of
the Trust; Senior Vice President and Director of SCMI since April 1990; Director
and Senior Vice President, Schroder Advisors.
MARK ASTLEY, 33, 787 Seventh Avenue, New York, New York - Vice President of the
Trust; First Vice President of SCMI, prior thereto, employed by various
affiliates of SCMI in various positions in the investment research and portfolio
management areas since 1987.
ROBERT G. DAVY, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of SCMI in various positions in the investment
research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON, 55, 787 Seventh Avenue, New York, New York - Vice
President of the Trust; Secretary of SCM since July 1995; Senior Vice President
(since April 1997) and General Counsel of Schroders Incorporated since May 1987;
prior thereto, partner of Sullivan & Worcester, a law firm.
RICHARD R. FOULKES, 51, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd.
since 1989.
ROBERT JACKOWITZ, 30, 787 Seventh Avenue, New York, New York - Treasurer of the
First Trust; Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI and SCM since April
1997; and Assistant Treasurer of Schroders Incorporated since January 1990.
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<PAGE>
JOHN Y. KEFFER, 54, Two Portland Square, Portland, Maine - Vice President of the
Trust; President of FFC, the Fund's transfer and dividend disbursing agent and
other affiliated entities including Forum Financial Services, Inc. and Forum
Advisors, Inc.
JANE P. LUCAS, 35, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director and Senior Vice President SCMI; Director of SCM since
September 1995; Director of Schroder Advisors since September 1996; Assistant
Director Schroder Investment Management Ltd. since June 1991.
CATHERINE A. MAZZA, 37, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
MICHAEL PERELSTEIN, 41, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Director since May 1997 and Senior Vice President of SCMI since
January 1997; prior thereto, Managing Director of MacKay - Shields Financial
Corp.
ALEXANDRA POE, 36, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust; Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; Secretary of
Schroder Advisors; prior thereto, an investment management attorney with Gordon
Altman Butowsky Weitzen Shalov & Wein since July 1994; prior thereto counsel and
Vice President of Citibank, N.A. since 1989.
THOMAS G. SHEEHAN, 42, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust; Managing Director, Forum
Financial Services, Inc. since 1993; prior thereto, Special Counsel, U.S.
Securities and Exchange Commission, Division of Investment Management,
Washington, D.C.
FARIBA TALEBI, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Group Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987;
Director of SCM since April 1997.
JOHN A. TROIANO, 38, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCM since April 1997; Chief Executive Officer, since
April 1, 1997, of SCMI and Managing Director and Senior Vice President of SCMI
since October 1995; prior thereto, employed by various affiliates of SCMI in
various positions in the investment research and portfolio management areas
since 1981.
IRA L. UNSCHULD, 31, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993.
CATHERINE S. WOOLEDGE, 55, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since November 1996. Prior thereto, associate at Morrison &
Foerster, Washington, D.C. from October 1994 to November 1996, associate
corporate counsel at Franklin Resources, Inc. from September 1993 to September
1994, and prior thereto associate at Drinker Biddle & Reath, Philadelphia, PA.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
Schroder Advisors is a wholly owned subsidiary of SCMI, which is a wholly owned
subsidiary of Schroders Incorporated, which in turn is an indirect, wholly owned
U.S. subsidiary of Schroders plc. Schroder Capital Management Inc. ("SCM") is
also a wholly owned subsidiary of Schroders Incorporated.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive an
annual fee of $1,000 and a fee of $250 for each meeting of the Trust Board
attended by them except in the case of Mr. Schwab, who receives an annual fee of
$1,500 and a fee of $500 for each meeting attended. The Fund has no bonus,
profit sharing, pension or retirement plans.
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The following table provides the fees paid to each Trustee of the Trust for the
twelve months ended May 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Name of Trustee Aggregate Pension or Estimated Annual Total Compensation
Compensation From Retirement Benefits Benefits Upon From Trust And Fund
Trust Accrued As Part of Retirement Complex Paid To
Trust Expenses Trustees
- ------------------------------- -------------------- --------------------- -------------------- ---------------------
Mr. Guernsey $2,250 $0 $0 $2,250
Mr. Hansmann 750 0 0 750
Mr. Howell 2,250 0 0 2,250
Mr. Michalis 2,000 0 0 2,000
Mr. Schwab 4,000 0 0 4,000
Mr. Smith 0 0 0 0
</TABLE>
As of September 30, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares.
While the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result it may be difficult for
U.S. investors to effect service upon such persons within the U.S., or to
realize judgments of courts of the U.S. predicated upon civil liabilities of
such persons under the Federal securities laws of the U.S. The Trust has been
advised that there is substantial doubt as to the enforceability in the United
Kingdom of such civil remedies and criminal penalties as are afforded by the
Federal securities laws of the U.S. Also it is unclear if extradition treaties
now in effect between the U.S. and the United Kingdom would subject such persons
to effective enforcement of the criminal penalties of such acts.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 1, 1997, Performa Global Growth Fund (the "Fund"), a series of
Norwest Advantage Funds, a Delaware business trust registered with the SEC as an
open-end, management investment company, invests all of its investable assets in
the Portfolio and may be deemed to control the Portfolio for purposes of the
1940 Act.
Norwest Advantage Funds has informed the Trust that whenever the Fund is
requested to vote on matters pertaining to the Portfolio, the Fund will hold a
meeting of its shareholders and will cast its vote as instructed by its
shareholders. This only applies to matters for which the Fund would be required
to have a shareholder meeting if it directly held investment securities rather
than invested in the Portfolio. It is anticipated that any other registered
investment company (or series thereof) that may in the future invest in the
Portfolio will follow the same or a similar practice.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY SERVICES
SCMI, 787 Seventh Avenue, New York, New York, 10019, serves as Adviser to the
Portfolio pursuant to an investment advisory agreement. SCMI is a wholly owned
U.S. subsidiary of Schroders Incorporated (doing business in New York State as
Schroders Holdings), the wholly owned U.S. holding company subsidiary of
Schroders plc. Schroders plc is the holding company parent of a large worldwide
group of banks and financial service companies (referred to as the "Schroder
Group"), with associated companies and branch and representative offices located
in seventeen countries worldwide. The Schroder Group specializes in providing
investment management services, with Group funds under management currently in
excess of $175 billion.
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<PAGE>
Pursuant to the investment advisory agreement, SCMI is responsible for managing
the investment and reinvestment of the assets included in the Portfolio and for
continuously reviewing, supervising and administering the Portfolio's
investments. In this regard, it is the responsibility of SCMI to make decisions
relating to the Portfolio's investments and to place purchase and sale orders
regarding such investments with brokers or dealers selected by it in its
discretion. SCMI also furnishes to the Board, which has overall responsibility
for the business and affairs of the Trust, periodic reports on the investment
performance of the Portfolio.
Under the terms of the investment advisory agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement will continue in effect provided such
continuance is approved annually: (1) by the holders of a majority of the
outstanding voting securities of the Portfolio (as defined by the 1940 Act) or
by the Board; and (2) by a majority of the Trustees who are not parties to such
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The investment advisory agreement may be terminated without penalty by
vote of the Trustees or the interestholders of the Portfolio on 60 days' written
notice to the Adviser, or by the Adviser on 60 days' written notice to the Trust
and it will terminate automatically if assigned. The investment advisory
agreement also provides that, with respect to the Portfolio, neither SCMI nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the performance of its or their duties to the Portfolio,
except for willful misfeasance, bad faith or gross negligence in the performance
of the SCMI's or their duties or by reason of reckless disregard of its or their
obligations and duties under the investment advisory agreement.
For its services, the Portfolio pays SCMI a fee at an annual rate of 0.90% of
its average daily net assets.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787 Seventh
Avenue, New York, New York 10019. The Trust has also entered into a
sub-administration agreement with Forum Administrative Services, Limited
Liability Company ("Forum"). Pursuant to their agreements, Schroder Advisors and
Forum provide certain management and administrative services necessary for the
Portfolio's operations, other than the investment management and administrative
services provided to the Portfolio by SCMI pursuant to the investment advisory
agreement, including among other things: (1) preparation of shareholder reports
and communications; (2) regulatory compliance, such as reports to and filings
with the Securities and Exchange Commission and state securities commissions;
and (3) general supervision of the operation of the Portfolio, including
coordination of the services performed by the Portfolio's investment adviser,
transfer agent, custodian, independent accountants, legal counsel and others.
Schroder Advisors is a wholly owned subsidiary of SCMI, and is a registered
broker-dealer organized to act as administrator and distributor of mutual
funds. Effective July 5, 1995, Schroder Advisors changed its name from Schroder
Capital Distributors Inc.
For these services, Schroder Advisors is entitled to receive from the Portfolio
a fee at the annual rate of 0.15% of the Portfolio's average daily net assets.
Forum is entitled to receive from the Portfolio a fee at the annual rate of
0.075% of the Portfolio's average daily net assets for its services.
The administrative services agreement and sub-administration agreement are
terminable with respect to the Portfolio without penalty, at any time, by vote
of a majority of the Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the operation of the
Portfolio's Distribution Plan or in the administrative services agreement or
sub-administration agreement, upon not more than 60 days' written notice to
Schroder Advisors or Forum, as appropriate, or by vote of the holders of a
majority of the shares of the Portfolio, or, upon 60 days' notice, by Schroder
Advisors or Forum. The administrative services agreement will terminate
automatically in the event of its assignment.
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<PAGE>
The sub-administration agreement is terminable with respect to the Portfolio
without penalty, at any time, by the Board and the Adviser upon 60 days' written
notice to Forum or by Forum upon 60 days' written notice to the Portfolio and
the Adviser, as appropriate.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Securities Services division
located in London, England, acts as custodian of the Portfolio's assets but
plays no role in making decisions as to the purchase or sale of portfolio
securities for the Portfolio. Pursuant to rules adopted under the 1940 Act, the
Portfolio may maintain its foreign securities and cash in the custody of certain
eligible foreign banks and securities depositories. Selection of these foreign
custodial institutions is made by the Board following a consideration of a
number of factors, including (but not limited to) the reliability and financial
stability of the institution; the ability of the institution to perform capably
custodial services for the Portfolio; the reputation of the institution in its
national market; the political and economic stability of the country in which
the institution is located; and further risks of potential nationalization or
expropriation of Portfolio assets.
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as independent auditors for the Trust.
BROKERAGE ALLOCATION AND OTHER PRACTICES
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for the other investment advisory
clients of SCMI are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which in SCMI's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio securities
for one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. Since most brokerage transactions for the Portfolio are placed with
foreign broker-dealers, certain portfolio transaction costs for the Portfolio
may be higher than fees for similar transactions executed on U.S. securities
exchanges. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price paid by the Portfolio
usually includes an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by the Portfolio includes a disclosed, fixed
commission or discount retained by the underwriter or dealer.
The Investment Advisory Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Portfolio's investments with brokers or dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. SCMI places all such orders for the purchase and sale of
portfolio securities and buys and sells securities for the Portfolio through a
substantial number of brokers and dealers. In so doing, SCMI uses its
19
<PAGE>
best efforts to obtain for the Portfolio the most favorable price and execution
available. The Portfolio may, however, pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. In seeking the most favorable price and execution, SCMI, having
in mind the Portfolio's best interests, considers all factors it deems relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealers involved and the
quality of service rendered by the broker-dealers in other transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, SCMI may receive
research services from broker-dealers with which SCMI places the Portfolio's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such items as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to SCMI in advising various of its clients (including the
Portfolio), although not all of these services are necessarily useful and of
value in managing the Portfolio. The investment advisory fee paid by the
Portfolio is not reduced because SCMI and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), SCMI may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the Act) to SCMI an amount of
disclosed commission for effecting a securities transaction for the Portfolio in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
Subject to the policy of obtaining the best price consistent with quality of
execution on transactions, SCMI may employ: (1) Schroder & Co., Inc. and its
affiliates ("Schroder & Co."), affiliates of SCMI, to effect transactions on the
New York Stock Exchange; and (2) Schroder Securities Limited and its affiliates
("Schroder Securities"), also affiliates of SCMI, to effect transactions of the
Portfolio on certain foreign securities exchanges. Because of the affiliation
between SCMI and both Schroder & Co. and Schroder Securities, the Portfolio's
payment of commissions to them is subject to procedures adopted by the Board
designed to ensure that commissions will not exceed the usual and customary
brokers' commissions. No specific portion of the Portfolio's brokerage will be
directed to Schroder & Co. or Schroder Securities, and in no event will either
receive any brokerage in recognition of research services.
Payment of brokerage commissions to Schroder & Co. and Schroder Securities for
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on securities
exchanges paid by a registered investment company to a broker which is an
affiliated person of such investment company or an affiliated person of another
person so affiliated not exceed the usual and customary broker's commissions for
such transactions. It is the Portfolio's policy that commissions paid will in
the judgment of the officers of SCMI responsible for making portfolio decisions
and selecting brokers, be: (1) at least as favorable as commissions
contemporaneously charged by Schroder & Co. and Schroder Securities on
comparable transactions for its most favored unaffiliated customers; and (2) at
least as favorable as those which would be charged on comparable transactions by
other qualified brokers having comparable execution capability. The Board of
Trustees, including a majority of the non-interested Trustees, has adopted
procedures pursuant to Rule 17e-1 promulgated by the Securities and Exchange
Commission under Section 17(e) to ensure that commissions paid to Schroder
Securities by the Portfolio satisfy the foregoing standards. The Board will
review all transactions at least quarterly for compliance with these procedures.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder Securities and will not direct brokerage to
Schroder Securities in recognition of research services. Schroder Securities
commenced operations in 1990.
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<PAGE>
CAPITAL STOCK AND OTHER SECURITIES
Under the Trust Instrument, the Trustees are authorized to issue beneficial
interest in one or more separate and distinct series. Investments in the
Portfolio have no preference, preemptive, conversion or similar rights and are
fully paid and nonassessable, except as set forth below. Each investor in the
Portfolio is entitled to a vote in proportion to the amount of its investment
therein. Investors in the Portfolio and other series (collectively, the
"portfolios") of the Trust will all vote together in certain circumstances
(e.g., election of the Trustees and ratification of auditors, as required by the
1940 Act and the rules thereunder). One or more portfolios could control the
outcome of these votes. Investors do not have cumulative voting rights, and
investors holding more than 50% of the aggregate interests in the Trust or in
the Portfolio, as the case may be, may control the outcome of votes. The Trust
is not required and has no current intention to hold annual meetings of
investors, but the Trust will hold special meetings of investors when: (1) a
majority of the Trustees determines to do so; or (2) investors holding at least
10% of the interests in the Trust (or the Portfolio) request in writing a
meeting of investors in the Trust (or Portfolio). Except for certain matters
specifically described in the Trust Instrument, the Trustees may amend the
Trust's Trust Instrument without the vote of investors.
The Trust, with respect to the Portfolio, may enter into a merger or
consolidation, or sell all or substantially all of its assets, if approved by
the Trust's Board. The Portfolio may be terminated: (1) upon liquidation and
distribution of its assets, if approved by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in the 1940 Act); or (2)
by the Trustees on written notice to the Portfolio's investors. Upon liquidation
or dissolution of any Portfolio, the investors therein would be entitled to
share pro rata in its net assets available for distribution to investors.
The Trust is organized as a business trust under the laws of the State of
Delaware. The Trust's interestholders are not personally liable for the
obligations of the Trust under Delaware law. The Delaware Business Trust Act
provides that an interestholder of a Delaware business trust shall be entitled
to the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust interestholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or an interestholder
is subject to the jurisdiction of courts in those states, the courts may not
apply Delaware law, and may thereby subject the Trust to liability. To guard
against this risk, the Trust Instrument of the Trust disclaims liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
interestholder held personally liable for the obligations of the Trust. Thus,
the risk of an interestholder incurring financial loss beyond his investment
because of shareholder liability is limited to circumstances in which: (1) a
court refuses to apply Delaware law; (2) no contractual limitation of liability
is in effect; and (3) the Trust itself is unable to meet its obligations. In
light of Delaware law, the nature of the Trust's business, and the nature of its
assets, the Board believes that the risk of personal liability to a Trust
interestholder is remote.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES
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. All investments in the Portfolio are made and withdrawn at the net
asset value ("NAV") next determined after an order is received by the Portfolio.
NAV per share is calculated by dividing the aggregate value of the Portfolio's
assets less all liabilities by the number of shares of the Portfolio
outstanding.
TAX STATUS
The Portfolio will be classified for federal income tax purposes as a
partnership that will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax; instead, each investor in
the Portfolio will be required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, and credits, without regard to whether it has received any cash
distributions from the Portfolio. The Portfolio also will not be subject to
Delaware income or franchise tax.
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Each investor in the Portfolio will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for, among other things, purposes of determining whether the investor
satisfies the requirements to qualify as a regulated investment company ("RIC").
Accordingly, the Portfolio intends to conduct its operations so that its
investors that intend to qualify as RICs ("RIC investors") will be able to
satisfy all those requirements.
Distributions to an investor from the Portfolio (whether pursuant to a partial
or complete withdrawal or otherwise) will not result in the investor's
recognition of any gain or loss for federal income tax purposes, except that:
(1) gain will be recognized to the extent any cash that is distributed exceeds
the investor's basis for its interest in the Portfolio before the distribution;
(2) income or gain will be recognized if the distribution is in liquidation of
the investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio; (3) loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables; and (4) gain or loss may be recognized on a distribution
to an investor that contributed property to the Portfolio. An investor's basis
for its interest in the Portfolio generally will equal the amount of cash and
the basis of any property it invests in the Portfolio, increased by the
investor's share of the Portfolio's net income and gains and decreased by: (a)
the amount of cash and the basis of any property the Portfolio distributes to
the investor; and (b) the investor's share of the Portfolio's losses.
Dividends and interest received by the Portfolio may be subject to income,
withholding, or other taxes imposed by foreign countries and; U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors.
The Portfolio may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production
of, passive income. Under certain circumstances, a RIC that holds stock of a
PFIC (including a RIC investor's indirect holding thereof through its interest
in the Portfolio) will be subject to federal income tax on a portion of any
"excess distribution" received on the stock or of any gain on disposition of the
stock (collectively "PFIC income"), plus interest thereon, even if the RIC
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the RIC's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders.
If the Portfolio invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund," then in lieu of the foregoing tax and interest obligation, the
Portfolio would be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain (the
excess of net long-term capital gain over net short-term capital loss) - which
most likely would have to be distributed by the Portfolio's RIC investors to
satisfy the distribution requirements applicable to them - even if those
earnings and gain were not received by it. In most instances it will be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Three bills passed by Congress in 1991 and 1992 and vetoed by President Bush
would have substantially modified the taxation of U.S. shareholders of foreign
corporations, including eliminating the provisions described above dealing with
PFICs and replacing them (and other provisions) with a regulatory scheme
involving entities called "passive foreign corporations." The "Tax
Simplification and Technical Corrections Bill of 1993," passed in May 1994 by
the House of Representatives, contains the same modifications. It is unclear at
this time whether, and in what form, the proposed modifications may be enacted
into law.
Proposed regulations have been published pursuant to which certain RICs would be
entitled to elect to "mark to market" their stock in certain PFICs. "Marking to
market," in this context, means recognizing as gain for each taxable year the
excess, as of the end of that year, of the fair market value of each such PFIC's
stock over the adjusted basis in that stock (including marked-to-market gain for
each prior year for which an election was in effect).
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Portfolio realizes in
connection therewith. The Portfolio's income from foreign
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currencies (except certain gains therefrom that may be excluded by future
regulations), and income from transactions in hedging instruments derived by it
with respect to its business of investing in securities or foreign currencies,
will qualify as permissible income for its RIC investors under the requirement
that at least 90% of a RIC's gross income each taxable year consist of specified
types of income. However, income from the disposition by the Portfolio of
hedging instruments (other than those on foreign currencies) held for less than
three months will be subject to the requirement applicable to its RIC investors
that less than 30% of a RIC's gross income each taxable year consist of certain
short-term gains ("Short-Short Limitation"). Income from the disposition of
foreign currencies, and hedging instruments on foreign currencies, that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) also will be subject to
the Short-Short Limitation for its RIC investors if they are held for less than
three months.
If the Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether its RIC investors
satisfy the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent the Portfolio does
not so qualify, it may be forced to defer the closing out of certain hedging
instruments beyond the time when it otherwise would be advantageous to do so, in
order for its RIC investors to qualify or continue to qualify as RICs.
UNDERWRITERS
Forum Financial Services, Inc., Two Portland Square, Portland, Maine 04101
serves as the Trust's placement agent. The placement agent will receive no
compensation for such placement agent services.
CALCULATIONS OF PERFORMANCE DATA
Not applicable.
FINANCIAL STATEMENTS
Not applicable.
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PART B
(STATEMENT OF ADDITIONAL INFORMATION)
SCHRODER CAPITAL FUNDS
--------
SCHRODER U.S. SMALLER COMPANIES PORTFOLIO
OCTOBER 14, 1997
COVER PAGE
- ----------
Not applicable.
TABLE OF CONTENTS
- -----------------
General Information and History........................................ B-1
Investment Objectives and Policies..................................... B-1
Management of the Trust................................................ B-9
Control Persons and Principal Holders of Securities.................... B-12
Investment Advisory and Other Services................................. B-12
Brokerage Allocation and Other Practices............................... B-14
Capital Stock and Other Securities..................................... B-16
Purchase, Redemption and Pricing of Securities......................... B-16
Tax Status............................................................. B-16
Underwriters........................................................... B-17
Calculations of Performance Data....................................... B-17
Financial Statements................................................... B-17
GENERAL INFORMATION AND HISTORY
- -------------------------------
Not applicable.
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
INTRODUCTION
Part A contains information about the investment objective and policies of the
Schroder U.S. Smaller Companies Portfolio (the "Portfolio"), a series of
Schroder Capital Funds (the "Trust"). The following discussion is intended to
supplement the disclosure in Part A concerning the Portfolio's investments,
investment techniques and strategies and the risks associated therewith. This
Part B should be read only in conjunction with Part A.
DEFINITIONS
As used in this Part B, the following terms shall have the meanings listed:
"Board" shall mean the Board of Trustees of the Trust.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1940 Act" shall mean the Investment Company Act of 1940, as amended.
<PAGE>
"Commission" shall mean the U.S. Securities and Exchange Commission.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities that have remaining maturities
not exceeding one year. Agencies and instrumentalities that issue or guarantee
debt securities and that have been established or sponsored by the U.S.
Government include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association, the Government National
Mortgage Association and the Student Loan Marketing Association. Except for
obligations issued by the U.S. Treasury and the Government National Mortgage
Association, none of the obligations of the other agencies or instrumentalities
referred to above is backed by the full faith and credit of the U.S. Government.
BANK OBLIGATIONS
The Portfolio may invest in obligations of U.S. banks (including certificates of
deposit, bankers' acceptances and time deposits) having total assets at the time
of purchase in excess of $1 billion. Such banks must be insured by the Federal
Deposit Insurance Corporation.
A certificate of deposit is an interest-bearing negotiable certificate issued by
a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date. A time deposit earns a specified rate of
interest over a definite time period; however, unlike certificates of deposit, a
time deposit cannot be traded in the secondary market.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper, that is short-term unsecured
promissory notes issued in bearer form by bank holding companies, corporations
and finance companies. The commercial paper purchased by the Portfolio for
temporary defensive purposes consists of direct obligations of domestic issuers
that, at the time of investment, are rated "P-1" by Moody's Investors Service
("Moody's") or "A-1" by Standard & Poor's ("S&P"), or securities that, if not
rated, are issued by companies having an outstanding debt issue currently rated
"Aa" by Moody's or "AAA" or "AA" by S&P. The rating "P-1" is the highest
commercial paper rating assigned by Moody's and the rating "A-1" is the highest
commercial paper rating assigned by S&P.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements that mature or may be
terminated by notice in seven days or less with U.S. banks or broker-dealers. In
a typical repurchase agreement the seller of a security commits itself at the
time of the sale to repurchase that security from the buyer at a mutually
agreed-upon time and price. The repurchase price exceeds the sale price,
reflecting an agreed-upon interest rate effective for the period the buyer owns
the security subject to repurchase. The agreed-upon rate is unrelated to the
interest rate on that security. Schroder Capital Management Inc. ("SCMI"), the
Portfolio's investment adviser, will monitor the value of the underlying
collateral at all times during the term of the repurchase agreement to insure
that the value of the collateral always equals or exceeds the repurchase price.
In the event of default by the seller under the repurchase agreement, the
Portfolio may have difficulties in exercising its rights to the underlying
collateral and may incur costs and experience time delays in connection with the
disposition of such collateral. To evaluate potential risks, SCMI reviews the
creditworthiness of those banks and dealers with which the Portfolio enters into
repurchase agreements.
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WARRANTS
The Portfolio may invest in warrants. Warrants are options to purchase equity
securities at specific prices valid for a specific period of time. Their prices
do not necessarily move parallel to the prices of the underlying securities.
Warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer. The Portfolio may not invest in warrants
if, as a result, more than 5% of its net assets would be so invested or if, more
than 2% of its net assets would be so invested in warrants that are not listed
on the New York or American Stock Exchanges.
HIGH YIELD/JUNK BONDS
The Portfolio may invest up to 5% of its assets in bonds rated below "Baa" by
Moody's or "BBB" by S&P (commonly known as "high yield/high risk securities" or
"junk bonds"). Ratings of bonds represents the rating agencies' opinion
regarding their quality, are not a guarantee of quality and may be reduced after
the Portfolio has acquired the security. Credit ratings attempt to evaluate the
safety of principal and interest payments and do not reflect an assessment of
the volatility of the security's market value or the liquidity of an investment
in the security. In addition, a rating agency may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer's financial
condition may be better or worse than the rating indicates.
Securities rated less than "Baa" by Moody's or "BBB" by S&P are classified as
non-investment grade securities and securities rated "Baa" and "BB"
respectively, are considered speculative by those rating agencies. Changes in
economic condition or other circumstances are more likely to lead to a weakened
capacity for such securities to make principal and interest payments than is the
case for higher grade debt securities. Debt securities rated below investment
grade are deemed by these agencies to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal and may involve
substantial risk exposure to adverse conditions. Junk bonds includes securities
that are in default or face the risk of default with respect to the payment of
principal or interest. Such securities are generally unsecured and are often
subordinated to other creditors of the issuer. To the extent the Portfolio is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings, the Portfolio may incur additional expenses and have
limited legal recourse in the event of a default.
Lower rated debt securities generally offer a higher current yield than that
available from higher grade issuers, but they involve higher risks, in that they
are especially subject to adverse changes in general economic conditions and in
the industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress, which could adversely
effect their ability to make payments of principal and interest and increase the
possibility of default. In addition, such issuers may not have more traditional
methods of financing available to them, and may be unable to repay debt at
maturity by refinancing. The risk of loss due to default by such issuers is
significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.
The market for lower rated securities has expanded rapidly in recent years, and
its growth paralleled a long economic expansion. In the past, the prices of many
lower rated debt securities declined substantially, reflecting an expectation
that many issuers of such securities might experience financial difficulties. As
a result, the yields on lower rated debt securities rose dramatically. However,
such higher yields did not reflect the value of the income stream that holders
of such securities could lose a substantial portion of their value as a result
of the issuers' financial restructuring or default. There can be no assurance
that such declines will not recur. The market for lower rated debt securities
generally is thinner and less active than that for higher quality securities,
which may limit the Portfolio's ability to sell such securities at fair value in
response to changes in the economy or the financial markets. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower rated securities, especially in a
thinly traded market.
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ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under Part A sets forth the circumstances
in which the Portfolio may invest in illiquid and restricted securities. In
connection with the Portfolio's original purchase of restricted securities it
may negotiate rights with the issuer to have such securities registered for sale
at a later time. Further, the expenses of registration of restricted securities
that are illiquid may also be negotiated by the Portfolio with the issuer at the
time such securities are purchased by the Portfolio. When registration is
required, however, a considerable period may elapse between a decision to sell
the securities and the time the Portfolio would be permitted to sell such
securities. A similar delay might be experienced in attempting to sell such
securities pursuant to an exemption from registration. Thus, the Portfolio may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the restrictions
stated in Part A. Under applicable regulatory requirements (which are subject to
change), the loan collateral must, on each business day, at least equal the
market value of the loaned securities and must consist of cash, bank letters of
credit, U.S. Government securities, or other cash equivalents in which the
Portfolio is permitted to invest. To be acceptable as collateral, letters of
credit must obligate a bank to pay amounts demanded by the Portfolio if the
demand meets the terms of the letter. Such terms and the issuing bank must be
satisfactory to the Portfolio. In a portfolio securities lending transaction,
the Portfolio receives from the borrower an amount equal to the interest paid or
the dividends declared on the loaned securities during the term of the loan as
well as the interest on the collateral securities, less any finders' or
administrative fees the Portfolio pays in arranging the loan. The Portfolio may
share the interest it receives on the collateral securities with the borrower as
long as it realizes at least a minimum amount of interest required by the
lending guidelines established by the Board. The Portfolio will not lend its
portfolio securities to any officer, director, employee or affiliate of the
Portfolio or SCMI. The terms of the Portfolio's loans must meet certain tests
under the Internal Revenue Code of 1986, as amended (the "Code") and permit the
Portfolio to reacquire loaned securities on five business days' notice or in
time to vote on any important matter.
COVERED CALLS AND HEDGING
As described in Part A, the Portfolio may write covered calls on up to 100% of
its total assets or employ one or more types of Hedging Instruments (as defined
in Part A). When hedging to attempt to protect against declines in the market
value of the Portfolio's securities, to permit the Portfolio to retain
unrealized gains in the value of portfolio securities that have appreciated, or
to facilitate selling securities for investment reasons, the Portfolio would:
(1) sell Stock Index Futures (as defined below), (2) purchase puts on such
futures or on securities, or (3) write covered calls on securities or such
futures. When hedging to establish a position in the equities markets as a
temporary substitute for purchasing particular equity securities (which the
Portfolio will normally purchase and then terminate the hedging position), the
Portfolio would: (1) purchase Stock Index Futures; or (2) purchase calls on such
futures or on securities. The Portfolio's strategy of hedging with Stock Index
Futures and options on such futures will be incidental to the Portfolio's
activities in the underlying cash market.
WRITING COVERED CALL OPTIONS. The Portfolio may write (i.e., sell) call options
("calls") if: (1) the calls are listed on a domestic securities or commodities
exchange; and (2) the calls are "covered" (i.e., the Portfolio owns the
securities subject to the call or other securities acceptable for applicable
escrow arrangements) while the call is outstanding. A call written on a Stock
Index Future must be covered by deliverable securities or segregated liquid
assets. If a call written by the Portfolio is exercised, the Portfolio forgoes
any profit from any increase in the market price above the call price of the
underlying investment on which the call was written.
When the Portfolio writes a call on a security, it receives a premium and agrees
to sell the underlying securities to a purchaser of a corresponding call on the
same security during the call period (usually not more than nine months) at a
fixed exercise price (which may differ from the market price of the underlying
security), regardless of market price changes during the call period. The risk
of loss will have been retained by the Portfolio if the price of the underlying
security should decline during the call period, which may be offset to some
extent by the premium.
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To terminate its obligation on a call it has written, the Portfolio may purchase
a corresponding call in a "closing purchase transaction." A profit or loss will
be realized, depending upon whether the net of the amount of option transaction
costs and the premium previously received on the call written was more or less
than the price of the call subsequently purchased. A profit may also be realized
if the call lapses unexercised because the Portfolio retains the underlying
security and the premium received. If the Portfolio could not effect a closing
purchase transaction due to the lack of a market, it would have to hold the
callable securities until the call lapsed or was exercised.
The Portfolio may also write calls on Stock Index Futures without owning a
futures contract or a deliverable bond, provided that at the time the call is
written, the Portfolio covers the call by segregating in escrow an equivalent
dollar amount of liquid assets. The Portfolio will segregate additional liquid
assets if the value of the escrowed assets drops below 100% of the current value
of the Stock Index Future. In no circumstances would an exercise notice require
the Portfolio to deliver a futures contract; it would simply put the Portfolio
in a short futures position, which is permitted by the Portfolio's hedging
policies.
PURCHASING CALLS AND PUTS. The Portfolio may purchase put options ("puts") that
relate to: (1) securities held by it; (2) Stock Index Futures (whether or not it
holds such futures in its portfolio); or (3) broadly-based stock indices. The
Portfolio may not sell puts other than those it previously purchased nor
purchase puts on securities it does not hold. The Portfolio may purchase calls:
(1) as to securities, broadly based stock indices or Stock Index Futures; or (2)
to effect a "closing purchase transaction" to terminate its obligation on a call
it has previously written. A call or put may be purchased only if, after such
purchase, the value of all put and call options held by the Portfolio would not
exceed 5% of its total assets.
When the Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and, except as to calls on stock indices, has
the right to buy the underlying investment from a seller of a corresponding call
on the same investment during the call period at a fixed exercise price. The
Portfolio benefits only if the call is sold at a profit or if, during the call
period, the market price of the underlying investment is above the sum of the
call price plus the transaction costs and the premium paid for the call and the
call is exercised. If the call is not exercised or sold (whether or not at a
profit), it will become worthless at its expiration date and the Portfolio will
lose its premium payments and the right to purchase the underlying investment.
When the Portfolio purchases a call on a stock index, it pays a premium, but
settlement is in cash rather than by delivery of an underlying investment.
When the Portfolio purchases a put, it pays a premium and, except as to puts on
stock indices, has the right to sell the underlying investment to a seller of a
corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on a security or Stock Index Future the Portfolio
owns enables it to attempt to protect itself during the put period against a
decline in the value of the underlying investment below the exercise price by
selling the underlying investment at the exercise price to a seller of a
corresponding put. If the market price of the underlying investment is equal to
or above the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration date and the Portfolio
will lose its premium payment and the right to sell the underlying investment;
the put may, however, be sold prior to expiration (whether or not at a profit).
Purchasing a put on either a stock index or on a Stock Index Future not held by
the Portfolio permits it either to resell the put or to buy the underlying
investment and sell it at the exercise price. The resale price of the put will
vary inversely with the price of the underlying investment. If the market price
of the underlying investment is above the exercise price and, as a result, the
put is not exercised, the put will become worthless on its expiration date. In
the event of a decline in price of the underlying investment, the Portfolio
could exercise or sell the put at a profit to attempt to offset some or all of
its loss on its portfolio securities. When the Portfolio purchases a put on a
stock index, or on a Stock Index Future not held by it, the put protects the
Portfolio to the extent that the index moves in a similar pattern to the
securities held. In the case of a put on a stock index or Stock Index Future,
settlement is in cash rather than by the Portfolio's delivery of the underlying
investment.
STOCK INDEX FUTURES. The Portfolio may buy and sell futures contracts only if
they relate to broadly based stock indices ("Stock Index Futures"). A stock
index is "broadly based" if it includes stocks that are not limited to issuers
in any particular industry or group of industries. Stock Index Futures obligate
the seller to deliver (and the
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purchaser to take) cash to settle the futures transaction or to enter into an
offsetting contract. No physical delivery of the underlying stocks in the index
is made.
No price is paid or received upon the purchase or sale of a Stock Index Future.
Upon entering into a futures transaction, the Portfolio will be required to
deposit an initial margin payment in cash or U.S. Treasury bills with a futures
commission merchant (the "futures broker"). The initial margin will be deposited
with the Portfolio's custodian in an account registered in the futures broker's
name; however the futures broker can gain access to that account only under
specified conditions. As the future is marked to market to reflect changes in
its market value, subsequent margin payments, called variation margin, will be
paid to or by the futures broker on a daily basis. Prior to expiration of the
future, if the Portfolio elects to close out its position by taking an opposite
position, a final determination of variation margin is made, additional cash is
required to be paid by or released to the Portfolio, and any loss or gain is
realized for tax purposes. Although Stock Index Futures by their terms call for
settlement by the delivery of cash, in most cases the obligation is fulfilled
without such delivery, by entering into an offsetting transaction. All futures
transactions are effected through a clearinghouse associated with the exchange
on which the contracts are traded.
Puts and calls on broadly based stock indices or Stock Index Futures are similar
to puts and calls on securities or other futures contracts except that all
settlements are in cash and gain or loss depends on changes in the index in
question (and thus on price movements in the stock market generally) rather than
on price movements in individual securities or futures contracts. When the
Portfolio buys a call on a stock index or Stock Index Future, it pays a premium.
During the call period, upon exercise of a call by the Portfolio, a seller of a
corresponding call on the same index will pay the Portfolio an amount of cash to
settle the call if the closing level of the stock index or Stock Index Future
upon which the call is based is greater than the exercise price of the call;
that cash payment is equal to the difference between the closing price of the
index and the exercise price of the call times a specified multiple (the
"multiplier") that determines the total dollar value for each point of
difference. When the Portfolio buys a put on a stock index or Stock Index
Future, it pays a premium and has the right during the put period to require a
seller of a corresponding put, upon the Portfolio's exercise of its put, to
deliver to the Portfolio an amount of cash to settle the put if the closing
level of the stock index or Stock Index Future upon which the put is based is
less than the exercise price of the put; that cash payment is determined by the
multiplier, in the same manner as described above as to calls.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE. The Portfolio's
custodian, or a securities depository acting for the custodian, will act as the
Portfolio's escrow agent, through the facilities of the Options Clearing
Corporation ("OCC"), as to the securities on which the Portfolio has written
options, or as to other acceptable escrow securities, so that no margin will be
required for such transactions. OCC will release the securities on the
expiration of the option or upon the Portfolio's entering into a closing
transaction. An option position may be closed out only on a market that provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option.
The Portfolio's option activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by the Portfolio may cause
it to sell related portfolio securities, thus increasing its turnover rate in a
manner beyond its control. The exercise by the Portfolio of puts on securities
or Stock Index Futures may cause the sale of related investments, also
increasing portfolio turnover. Although such exercise is within the Portfolio's
control, holding a put might cause the Portfolio to sell the underlying
investment for reasons that would not exist in the absence of the put. The
Portfolio will pay a brokerage commission each time it buys or sells a call, a
put or an underlying investment in connection with the exercise of a put or
call. Such commissions may be higher than those that would apply to direct
purchases or sales of the underlying investments. Premiums paid for options are
small in relation to the market value of such investments, and, consequently,
put and call options offer large amounts of leverage. The leverage offered by
trading in options could result in the Portfolio's net asset value being more
sensitive to changes in the value of the underlying investments.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS AND COVERED CALLS. The Portfolio must
operate within certain restrictions as to its long and short positions in Stock
Index Futures and options thereon under a rule (the "CFTC Rule") adopted by the
Commodity Futures Trading Commission (the "CFTC") under the Commodity Exchange
Act
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(the "CEA"), which excludes the Portfolio from registration with the CFTC as a
"commodity pool operator" (as defined in the CEA) if it complies with the CFTC
Rule. Under these restrictions the Portfolio will not, as to any positions,
whether short, long or a combination thereof, enter into Stock Index Futures and
options thereon for which the aggregate initial margins and premiums exceed 5%
of the fair market value of its total assets, with certain exclusions as defined
in the CFTC Rule. Under the restrictions, the Portfolio also must, as to its
short positions, use Stock Index Futures and options thereon solely for
bona-fide hedging purposes within the meaning and intent of the applicable
provisions under the CEA.
Transactions in options by the Portfolio are subject to limitations established
by each of the exchanges governing the maximum number of options that may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options which the Portfolio may write
or hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Stock Index Futures. An exchange may order the
liquidation of positions found to be in violation of those limits and may impose
certain other sanctions. Due to requirements under the 1940 Act, as amended,
when the Portfolio purchases a Stock Index Future, the Portfolio will maintain,
in a segregated account or accounts with its custodian bank, cash or
readily-marketable, short-term (maturing in one year or less) debt instruments
in an amount equal to the market value of the securities underlying such Stock
Index Future, less the margin deposit applicable to it.
LIMITS ON USE OF HEDGING INSTRUMENTS. Due to the Short-Short Limitation
described under "Taxation," the Portfolio will limit the extent to which it
engages in the following activities but will not be precluded from them: (1)
selling investments, including Stock Index Futures, held for less than three
months, whether or not they were purchased on the exercise of a call held by the
Portfolio; (2) purchasing calls or puts that expire in less than three months;
(3) effecting closing transactions with respect to calls or puts purchased less
than three months previously; (4) exercising puts held for less than three
months; and (5) writing calls on investments held for less than three months.
POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks discussed above,
there is a risk in using short hedging by selling Stock Index Futures or
purchasing puts on stock indices that the prices of the applicable index (thus
the prices of the Hedging Instruments) will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of the Portfolio's equity
securities. The ordinary spreads between prices in the cash and futures markets
are subject to distortions due to differences in the natures of those markets.
First, all participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures markets could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the futures markets may
cause temporary price distortions.
The risk of imperfect correlation increases as the composition of the Portfolio
diverges from the securities included in the applicable index. To compensate for
the imperfect correlation of movements in the price of the equity securities
being hedged and movements in the price of the Hedging Instruments, the
Portfolio may use Hedging Instruments in a greater dollar amount than the dollar
amount of equity securities being hedged if the historical volatility of the
prices of such equity securities being hedged is more than the historical
volatility of the applicable index. It is also possible that where the Portfolio
has used Hedging Instruments in a short hedge, the market may advance and the
value of equity securities held in the Portfolio may decline. If this occurred,
the Portfolio would lose money on the Hedging Instruments and also experience a
decline in value in its equity securities. However, while this could occur for a
very brief period or to a very small degree, the value of a diversified
portfolio of equity securities will tend to move over time in the same direction
as the indices upon which the Hedging Instruments are based.
7
<PAGE>
If the Portfolio uses Hedging Instruments to establish a position in the
equities markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying Stock Index Futures and/or calls on such
futures, on securities or on stock indices, it is possible that the market may
decline. If the Portfolio then concluded not to invest in equity securities at
that time because of concerns as to possible further market decline or for other
reasons, it would realize a loss on the Hedging Instruments that is not offset
by a reduction in the price of the equity securities purchased.
SHORT SALES AGAINST-THE-BOX
After the Portfolio makes a short sale against-the-box, while the short position
is open, it must own an equal amount of the securities sold short or by virtue
of ownership of securities have the right, without payment of further
consideration, to obtain an equal amount of the securities sold short. Short
sales against-the-box may be made to defer recognition of gain or loss, for
federal income tax purposes, on the sale of securities "in the box" until the
short position is closed out.
INVESTMENT RESTRICTIONS
The following investment restrictions, except where stated to be fundamental
policies, are non-fundamental policies of the Portfolio. The policies defined as
fundamental, together with the fundamental policies and investment objective
described in the Part A, cannot be changed without the vote of a "majority" of
the Portfolio's outstanding voting interests. Under the 1940 Act, such a
"majority" vote is defined as the vote of the holders of the lesser of: (1) 67%
or more of the interests present or represented by proxy at a meeting of
interestholders, if the holders of more than 50% of the outstanding interests
are present; or (2) more than 50% of the outstanding interests.
FUNDAMENTAL LIMITATIONS. The following investment restrictions of the Portfolio
are fundamental policies:
(a) With respect to 75% of its assets, the Portfolio may not purchase a
security other than a U.S. Government Security if, as a result, more
than 5% of its total assets would be invested in the securities of a
single issuer or it would own more than 10% of the outstanding voting
securities of any single issuer.
(b) The Portfolio may not purchase securities if, immediately after the
purchase, 25% or more of the value of its total assets would be
invested in the securities of issuers conducting their principal
business activities in the same industry; provided, however, that there
is no limit on investments in U.S.
Government Securities.
(c) The Portfolio may borrow money from banks or by entering into reverse
repurchase agreements, provided that such borrowings do not exceed 33
1/3% of the value of the Portfolio's total assets (computed immediately
after the borrowing).
(d) The Portfolio may not issue senior securities except to the extent
permitted by the 1940 Act.
(e) The Portfolio may not underwrite securities of other issuers, except to
the extent that it may be considered to be acting as an underwriter in
connection with the disposition of portfolio securities.
(f) The Portfolio may not make loans, except it may enter into repurchase
agreements, purchase debt securities that are otherwise permitted
investments and lend portfolio securities.
(g) The Portfolio may not purchase or sell real estate or any interest
therein, except that it may invest in debt obligations secured by real
estate or interests therein or securities issued by companies that
invest in real estate or interests therein.
(h) The Portfolio may not purchase or sell physical commodities unless
acquired as a result of owning securities or other instruments, but it
may purchase, sell or enter into financial options and futures and
forward currency contracts and other financial contracts or derivative
instruments.
8
<PAGE>
NONFUNDAMENTAL LIMITATIONS. The following investment restrictions of the
Portfolio are non-fundamental policies:
(a) The Portfolio's borrowings for other than temporary or emergency
purposes or meeting redemption requests may not exceed an amount equal
to 5% of the value of its net assets.
(b) The Portfolio may not acquire securities or invest in repurchase
agreements with respect to any securities if, as a result, more than
15% of its net assets (taken at current value) would be invested in
repurchase agreements not entitling the holder to payment of principal
within seven days and in securities that are not readily marketable by
virtue of restrictions on the sale of such securities to the public
without registration under the 1933 Act ("Restricted Securities").
(c) The Portfolio may not invest in securities of another investment
company, except to the extent permitted by the 1940 Act.
(d) The Portfolio may not purchase securities on margin, or make short
sales of securities (except short sales against the box), except for
the use of short-term credit necessary for the clearance of purchases
and sales of portfolio securities. The Portfolio may make margin
deposits in connection with permitted transactions in options, futures
contracts and options on futures contracts.
(e) The Portfolio may not invest in securities (other than fully
collateralized debt obligations) issued by companies that have
conducted continuous operations for less than three years, including
the operations of predecessors, unless guaranteed as to principal and
interest by an issuer in whose securities the Portfolio could invest,
if, as a result, more than 5% of the value of the Portfolio's total
assets would be so invested.
(f) The Portfolio may not pledge, mortgage, hypothecate or encumber any of
its assets except to secure permitted borrowings.
(g) The Portfolio may not invest in or hold securities of any issuer if, to
the Trust's knowledge, officers and trustees of the Trust or officers
and directors of the Portfolio's investment adviser, individually
owning beneficially more than 1/2 of 1% of the securities of the
issuer, in the aggregate own more than 5% of the issuer's securities.
(h) The Portfolio may not invest in interest in oil and gas or interests in
other mineral exploration or development programs.
(i) The Portfolio may not lend portfolio securities if the total value of
all loaned securities would exceed 25% of its total assets.
(j) The Portfolio may not purchase real estate limited partnership
interests.
(k) The Portfolio may not invest in warrants if, as a result, more than 5%
of its net assets would be so invested or if, more than 2% of its net
assets would be invested in warrants that are not listed on the New
York or American Stock Exchanges.
MANAGEMENT OF THE TRUST.
The following information relates to the principal occupations of each Trustee
and executive officer of the Trust during the past five years and shows the
nature of any affiliation with SCMI or Schroder Fund Advisors Inc. ("Schroder
Advisors"). Each of these individuals currently serves in the same capacity for
Schroder Capital Funds (Delaware), an investment company with series that
invests all of their assets in the Portfolio or other portfolios of the Trust,
and for Schroder Capital Funds II, a registered investment company.
9
<PAGE>
PETER E. GUERNSEY, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Insurance Consultant since August 1986; prior thereto
Senior Vice President, Marsh & McLennan, Inc., insurance brokers.
JOHN I. HOWELL, 80, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Private Consultant since February 1987; Honorary Director,
American International Group, Inc.; Director, American International Life
Assurance Company of New York.
CLARENCE F. MICHALIS, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy, Jr.
Foundation (charitable foundation).
HERMANN C. SCHWAB, 77, c/o the Trust, Two Portland Square, Portland, Maine -
Chairman and Trustee of the Trust; retired since March, 1988; prior thereto,
consultant to SCMI since February 1, 1984.
MARK J. SMITH*, 35, 33 Gutter Lane, London, England - President and Trustee of
the Trust; Senior Vice President and Director of SCMI since April 1990; Director
and Senior Vice President, Schroder Advisors.
MARK ASTLEY, 33, 787 Seventh Avenue, New York, New York - Vice President of the
Trust; First Vice President of SCMI, prior thereto, employed by various
affiliates of SCMI in various positions in the investment research and portfolio
management areas since 1987.
ROBERT G. DAVY, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of SCMI in various positions in the investment
research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON, 55, 787 Seventh Avenue, New York, New York - Vice
President of the Trust; Secretary of SCM since July 1995; Senior Vice President
(since April 1997) and General Counsel of Schroders Incorporated since May 1987;
prior thereto, partner of Sullivan & Worcester, a law firm.
RICHARD R. FOULKES, 51, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd.
since 1989.
ROBERT JACKOWITZ, 30, 787 Seventh Avenue, New York, New York - Treasurer of the
First Trust; Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI and SCM since April
1997; and Assistant Treasurer of Schroders Incorporated since January 1990.
JOHN Y. KEFFER, 54, Two Portland Square, Portland, Maine - Vice President of the
Trust; President of FFC, the Fund's transfer and dividend disbursing agent and
other affiliated entities including Forum Financial Services, Inc. and Forum
Advisors, Inc.
JANE P. LUCAS, 35, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director and Senior Vice President SCMI; Director of SCM since
September 1995; Director of Schroder Advisors since September 1996; Assistant
Director Schroder Investment Management Ltd. since June 1991.
CATHERINE A. MAZZA, 37, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
MICHAEL PERELSTEIN, 41, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Director since May 1997 and Senior Vice President of SCMI since
January 1997; prior thereto, Managing Director of MacKay - Shields Financial
Corp.
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ALEXANDRA POE, 36, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust; Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; Secretary of
Schroder Advisors; prior thereto, an investment management attorney with Gordon
Altman Butowsky Weitzen Shalov & Wein since July 1994; prior thereto counsel and
Vice President of Citibank, N.A. since 1989.
THOMAS G. SHEEHAN, 42, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust; Managing Director, Forum
Financial Services, Inc. since 1993; prior thereto, Special Counsel, U.S.
Securities and Exchange Commission, Division of Investment Management,
Washington, D.C.
FARIBA TALEBI, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Group Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987;
Director of SCM since April 1997.
JOHN A. TROIANO, 38, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCM since April 1997; Chief Executive Officer, since
April 1, 1997, of SCMI and Managing Director and Senior Vice President of SCMI
since October 1995; prior thereto, employed by various affiliates of SCMI in
various positions in the investment research and portfolio management areas
since 1981.
IRA L. UNSCHULD, 31, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993.
CATHERINE S. WOOLEDGE, 55, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since November 1996. Prior thereto, associate at Morrison &
Foerster, Washington, D.C. from October 1994 to November 1996, associate
corporate counsel at Franklin Resources, Inc. from September 1993 to September
1994, and prior thereto associate at Drinker Biddle & Reath, Philadelphia, PA.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
Schroder Advisors is a wholly owned subsidiary of SCMI, which is a wholly owned
subsidiary of Schroders Incorporated, which in turn is an indirect, wholly owned
U.S. subsidiary of Schroders plc. Schroder Capital Management Inc. ("SCM") is
also a wholly owned subsidiary of Schroders Incorporated.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Trust. Trustees of the Trust who are not
Interested Trustees, receive an annual fee of $1,000 and a fee of $250 for each
meeting of the Board attended by them except in the case of Mr. Schwab, who
receives an annual fee of $1,500 and a fee of $500 for each meeting attended.
The Trust has no bonus, profit sharing, pension or retirement plans.
The following information relates to the principal occupations of each Trustee
and executive officer of the Trust during the past five years and shows the
nature of any affiliation with SCMI. Each of these individuals currently serves
in the same capacity for Schroder Capital Funds (Delaware), an investment
company with a series that invests all of its assets in the Portfolio.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive an
annual fee of $1,000 and a fee of $250 for each meeting of the Trust Board
attended by them except in the case of Mr. Schwab, who receives an annual fee of
$1,500 and a fee of $500 for each meeting attended. The Fund has no bonus,
profit sharing, pension or retirement plans.
The following table provides the aggregate compensation paid to the Trustees of
the Trust by the Trust and paid to the Trustees of the Trust by all investment
companies in the "Fund Complex," which includes Schroder Capital Funds II and
Schroder Capital Funds (Delaware), open-end investment companies for which SCMI
serves as investment adviser, and Schroder Asian Growth Fund, Inc., a closed-end
investment company for which SCMI
11
<PAGE>
serves as investment adviser. Information is presented for the twelve month
period ended May 31, 1997, the Portfolio's last fiscal year.
<TABLE>
<S> <C> <C> <C> <C>
Pension or Total Compensation
Retirement Benefits From Trust And Fund
Aggregate Accrued As Part of Estimated Annual Complex Paid To
Compensation From Portfolio Expenses Benefits Upon Trustees*
Name of Trustee Trust Retirement
- ------------------------------- -------------------- --------------------- -------------------- ---------------------
Mr. Guernsey $1,750 $0 $0 $14,750
Mr. Hansmann 1,375 0 0 1,375
Mr. Howell 1,750 0 0 14,750
Mr. Michalis 1,750 0 0 1,750
Mr. Schwab 3,000 0 0 3,000
Mr. Smith 0 0 0 0
</TABLE>
As of September 30, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares.
While the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result it may be difficult for
U.S. investors to effect service upon such persons within the U.S., or to
realize judgments of courts of the U.S. predicated upon civil liabilities of
such persons under the Federal securities laws of the U.S. The Trust has been
advised that there is substantial doubt as to the enforceability in the United
Kingdom of such civil remedies and criminal penalties as are afforded by the
Federal securities laws of the U.S. Also it is unclear if extradition treaties
now in effect between the U.S. and the United Kingdom would subject such persons
to effective enforcement of the criminal penalties of such acts.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
- ----------------------------------------------------
As of September, 1997, Schroder U.S. Smaller Companies Fund, a series of
Schroder Capital Funds (Delaware), a Delaware business trust registered with the
SEC as an open-end management investment company, and Small Cap Opportunities
Fund, a series of Norwest Advantage Funds, a Delaware business trust registered
with the SEC as an open-end management investment company, invests all of their
investable assets in the Portfolio. As the majority interestholder in the
Portfolio, Small cap Opportunities Fund may be deemed to control the Portfolio
for purposes of the 1940 Act.
The investment companies that invest in the Portfolio have informed the Trust
that whenever they are requested to vote on matters pertaining to the Portfolio,
they will hold a meeting of their shareholders and will cast their votes as
instructed by their respective shareholders. This only applies to matters for
which they would be required to have a shareholder meeting if they directly held
investment securities rather than invested in the Portfolio. It is anticipated
that any other registered investment company (or series thereof) that may in the
future invest in the Portfolio will follow the same or a similar practice.
INVESTMENT ADVISORY AND OTHER SERVICES.
- ---------------------------------------
INVESTMENT ADVISORY SERVICES
SCMI, 787 Seventh Avenue, New York, New York, 10019, serves as investment
adviser to the Portfolio pursuant to an investment advisory agreement. SCMI is a
wholly owned U.S. subsidiary of Schroders Incorporated (doing business in New
York State as Schroders Holdings), the wholly owned U.S. holding company
subsidiary of Schroders plc. Schroders plc is the holding company parent of a
large worldwide group of banks and financial service companies (referred to as
the "Schroder Group"), with associated companies and branch and representative
12
<PAGE>
offices located in seventeen countries worldwide. The Schroder Group specializes
in providing investment management services, with Group funds under management
currently in excess of $175 billion.
Pursuant to the investment advisory agreement, SCMI is responsible for managing
the investment and reinvestment of the assets included in the Portfolio and for
continuously reviewing, supervising and administering the Portfolio's
investments. In this regard, it is the responsibility of SCMI to make decisions
relating to the Portfolio's investments and to place purchase and sale orders
regarding such investments with brokers or dealers selected by it in its
discretion. SCMI also furnishes to the Board, which has overall responsibility
for the business and affairs of the Trust, periodic reports on the investment
performance of the Portfolio.
Under the terms of the investment advisory agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement will continue in effect provided such
continuance is approved annually: (1) by the holders of a majority of the
outstanding voting securities of the Portfolio (as defined by the 1940 Act) or
by the Board; and (2) by a majority of the Trustees who are not parties to such
agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The investment advisory agreement may be terminated without penalty by
vote of the Trustees or the interestholders of the Portfolio on 60 days' written
notice to the Adviser, or by the Adviser on 60 days' written notice to the Trust
and it will terminate automatically if assigned. The investment advisory
agreement also provides that, with respect to the Portfolio, neither SCMI nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the performance of its or their duties to the Portfolio,
except for willful misfeasance, bad faith or gross negligence in the performance
of the SCMI's or their duties or by reason of reckless disregard of its or their
obligations and duties under the investment advisory agreement.
For SCMI's services, the Portfolio pays SCMI a fee at an annual rate of 0.60% of
the Portfolio's average daily net assets.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an administration
agreement with Schroder Advisors, 787 Seventh Avenue, New York, New York 10019.
The Trust has also entered into a sub-administration agreement with Forum
Administrative Services, LLC ("Forum"). Pursuant to their agreements, Schroder
Advisors and Forum provide certain management and administrative services
necessary for the Portfolio's operations, other than the investment management
and administrative services provided to the Portfolio by SCMI pursuant to the
investment advisory agreement, including among other things: (1) preparation of
shareholder reports and communications, (2) regulatory compliance, such as
reports to and filings with the Commission and state securities commissions; and
(3) general supervision of the operation of the Portfolio, including
coordination of the services performed by the Portfolio's investment adviser,
transfer agent, custodian, independent accountants, legal counsel and others.
Schroder Advisors is a registered broker-dealer organized to act as
administrator and distributor of mutual funds. Effective July 5, 1995, Schroder
Advisors changed its name from Schroder Capital Distributors Inc.
For these services, Schroder Advisors is not entitled to receive from the
Portfolio any fee. Forum is entitled to receive from the Portfolio a fee at the
annual rate of 0.10% of the Portfolio's average daily net assets for its
services.
The administrative services agreement and sub-administration agreement are
terminable with respect to the Portfolio without penalty, at any time, by vote
of a majority of the Trustees who are not "interested persons" of the Trust and
who have no direct or indirect financial interest in the administrative services
agreement or sub-administration agreement, upon not more than 60 days' written
notice to Schroder Advisors or Forum, as appropriate, or by vote of the holders
of a majority of the interests of the Portfolio, or, upon 60 days' notice, by
Schroder Advisors or Forum. The administrative services agreement will terminate
automatically in the event of its assignment.
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<PAGE>
The sub-administration agreement is terminable with respect to the Portfolio
without penalty, at any time, by the Board and Schroder Advisors upon 60 days'
written notice to Forum or by Forum upon 60 days' written notice to the
Portfolio and Schroder Advisors, as appropriate.
CUSTODIAN
The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New York 11245, acts
as custodian of the Portfolio's assets but plays no role in making decisions as
to the purchase or sale of portfolio securities for the Portfolio.
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109,
serves as independent accountants for the Trust.
BROKERAGE ALLOCATION AND OTHER PRACTICES.
- -----------------------------------------
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for the other investment advisory
clients of SCMI are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved. Thus, a particular
security may be bought or sold for certain clients even though it could have
been bought or sold for other clients at the same time. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling the security. In some instances, one client may sell a particular
security to another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which in SCMI's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio securities
for one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. Since most brokerage transactions for the Portfolio will be placed with
foreign broker-dealers, certain portfolio transaction costs for the Portfolio
may be higher than fees for similar transactions executed on U.S. securities
exchanges. There is generally no stated commission in the case of securities
traded in the over-the-counter markets, but the price paid by the Portfolio
usually includes an undisclosed dealer commission or mark-up. In underwritten
offerings, the price paid by the Portfolio includes a disclosed, fixed
commission or discount retained by the underwriter or dealer.
The investment advisory agreement authorizes and directs SCMI to place orders
for the purchase and sale of the Portfolio's investments with brokers or dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. SCMI places all such orders for the purchase and sale of
portfolio securities and buys and sells securities for the Portfolio through a
substantial number of brokers and dealers. In so doing, SCMI uses its best
efforts to obtain for the Portfolio the most favorable price and execution
available. The Portfolio may, however, pay higher than the lowest available
commission rates when SCMI believes it is reasonable to do so in light of the
value of the brokerage and research services provided by the broker effecting
the transaction. In seeking the most favorable price and execution, SCMI, having
in mind the Portfolio's best interests, considers all factors it deems relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends,
14
<PAGE>
the reputation, experience and financial stability of the broker-dealers
involved and the quality of service rendered by the broker-dealers in other
transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers which execute portfolio transactions for the
clients of such advisers. Consistent with this practice, SCMI may receive
research services from broker-dealers with which SCMI places the Portfolio's
portfolio transactions. These services, which in some cases may also be
purchased for cash, include such items as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to SCMI in advising various of its clients (including the
Portfolio), although not all of these services are necessarily useful and of
value in managing the Portfolio. The investment advisory fee paid by the
Portfolio is not reduced because SCMI and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"Act"), SCMI may cause the Portfolio to pay a broker-dealer which provides
"brokerage and research services" (as defined in the Act) to SCMI an amount of
disclosed commission for effecting a securities transaction for the Portfolio in
excess of the commission which another broker-dealer would have charged for
effecting that transaction.
Subject to the policy of obtaining the best price consistent with quality of
execution on transactions, SCMI may employ: (1) Schroder & Co. Inc. and its
affiliates ("Schroder & Co."), affiliates of SCMI, to effect transactions on the
New York Stock Exchange; and (2) Schroder Securities Limited and its affiliates
("Schroder Securities"), also affiliates of SCMI, to effect transactions of the
Portfolio on certain foreign securities exchanges. Because of the affiliation
between SCMI and both Schroder & Co. and Schroder Securities, the Portfolio's
payment of commissions to them is subject to procedures adopted by the Board
designed to ensure that commissions will not exceed the usual and customary
brokers' commissions. No specific portion of the Portfolio's brokerage will be
directed to Schroder & Co. or Schroder Securities, and in no event will either
receive any brokerage in recognition of research services.
Payment of brokerage commissions to Schroder & Co. and Schroder Securities for
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on a national
securities exchange paid by a registered investment company to a broker which is
an affiliated person of such investment company or an affiliated person of
another person so affiliated not exceed the usual and customary broker's
commissions for such transactions. It is the Portfolio's policy that commissions
paid will in the judgment of the officers of the Trust responsible for making
portfolio decisions and selecting brokers, be: (1) at least as favorable as
commissions contemporaneously charged by Schroder & Co. and Schroder Securities
on comparable transactions for its most favored unaffiliated customers; and (2)
at least as favorable as those which would be charged on comparable transactions
by other qualified brokers having comparable execution capability. The Board,
including a majority of the non-interested Trustees, has adopted procedures
pursuant to Rule 17e-1 promulgated by the SEC under Section 17(e) to ensure that
commissions paid to Schroder & Co. and Schroder Securities by the Portfolio
satisfy the foregoing standards. The Board will review all transactions at least
quarterly for compliance with these procedures.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder & Co. or Schroder Securities and will not direct
brokerage to these companies in recognition of research services.
15
<PAGE>
CAPITAL STOCK AND OTHER SECURITIES.
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Under the Trust Instrument, the Trustees are authorized to issue beneficial
interest in one or more separate and distinct series. Investments in the
Portfolio have no preference, preemptive, conversion or similar rights and are
fully paid and nonassessable, except as set forth below. Each investor in the
Portfolio is entitled to a vote in proportion to the amount of its investment
therein. Investors in the Portfolio and other series (collectively, the
"portfolios") of the Trust will all vote together in certain circumstances
(e.g., election of the Trustees and ratification of auditors, as required by the
1940 Act and the rules thereunder). One or more portfolios could control the
outcome of these votes. Investors do not have cumulative voting rights, and
investors holding more than 50% of the aggregate interests in the Trust or in
the Portfolio, as the case may be, may control the outcome of votes. The Trust
is not required and has no current intention to hold annual meetings of
investors, but the Trust will hold special meetings of investors when: (1) a
majority of the Trustees determines to do so; or (2) investors holding at least
10% of the interests in the Trust (or the Portfolio) request in writing a
meeting of investors in the Trust (or Portfolio). Except for certain matters
specifically described in the Trust Instrument, the Trustees may amend the
Trust's Trust Instrument without the vote of investors.
The Trust, with respect to the Portfolio, may enter into a merger or
consolidation, or sell all or substantially all of its assets, if approved by
the Trust's Board. The Portfolio may be terminated: (1) upon liquidation and
distribution of its assets, if approved by the vote of a majority of the
Portfolio's outstanding voting securities (as defined in the 1940 Act); or (2)
by the Trustees on written notice to the Portfolio's investors. Upon liquidation
or dissolution of any Portfolio, the investors therein would be entitled to
share pro rata in its net assets available for distribution to investors.
The Trust is organized as a business trust under the laws of the State of
Delaware. The Trust's interestholders are not personally liable for the
obligations of the Trust under Delaware law. The Delaware Business Trust Act
provides that an interestholder of a Delaware business trust shall be entitled
to the same limitation of liability extended to shareholders of private
corporations for profit. However, no similar statutory or other authority
limiting business trust interestholder liability exists in many other states,
including Texas. As a result, to the extent that the Trust or an interestholder
is subject to the jurisdiction of courts in those states, the courts may not
apply Delaware law, and may thereby subject the Trust to liability. To guard
against this risk, the Trust Instrument of the Trust disclaims liability for
acts or obligations of the Trust and requires that notice of such disclaimer be
given in each agreement, obligation and instrument entered into by the Trust or
its Trustees, and provides for indemnification out of Trust property of any
interestholder held personally liable for the obligations of the Trust. Thus,
the risk of an interestholder incurring financial loss beyond his investment
because of shareholder liability is limited to circumstances in which: (1) a
court refuses to apply Delaware law; (2) no contractual limitation of liability
is in effect; and (3) the Trust itself is unable to meet its obligations. In
light of Delaware law, the nature of the Trust's business, and the nature of its
assets, the Board believes that the risk of personal liability to a Trust
interestholder is remote.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
- -----------------------------------------------
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. All investments in the Portfolio are made and withdrawn at the net
asset value ("NAV") next determined after an order is received by the Portfolio.
NAV per share is calculated by dividing the aggregate value of the Portfolio's
assets less all liabilities by the number of shares of the Portfolio
outstanding.
TAX STATUS.
- -----------
The Portfolio will be classified for federal income tax purposes as a
partnership that will not be a "publicly traded partnership." As a result, the
Portfolio will not be subject to federal income tax; instead, each investor in
the Portfolio will be required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, and credits, without regard to whether it has received any cash
distributions from the Portfolio. The Portfolio also will not be subject to
Delaware income or franchise tax.
16
<PAGE>
Each investor in the Portfolio will be deemed to own a proportionate share of
the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for, among other things, purposes of determining whether the investor
satisfies the requirements to qualify as a regulated investment company ("RIC").
Accordingly, the Portfolio intends to conduct its operations so that its
investors that intend to qualify as RICs ("RIC investors") will be able to
satisfy all those requirements.
Distributions to an investor from the Portfolio (whether pursuant to a partial
or complete withdrawal or otherwise) will not result in the investor's
recognition of any gain or loss for federal income tax purposes, except that:
(1) gain will be recognized to the extent any cash that is distributed exceeds
the investor's basis for its interest in the Portfolio before the distribution;
(2) income or gain will be recognized if the distribution is in liquidation of
the investor's entire interest in the Portfolio and includes a disproportionate
share of any unrealized receivables held by the Portfolio; (3) loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables; and (4) gain or loss may be recognized on a distribution
to an investor that contributed property to the Portfolio. An investor's basis
for its interest in the Portfolio generally will equal the amount of cash and
the basis of any property it invests in the Portfolio, increased by the
investor's share of the Portfolio's net income and gains and decreased by: (a)
the amount of cash and the basis of any property the Portfolio distributes to
the investor; and (b) the investor's share of the Portfolio's losses.
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the gains and losses the Portfolio realizes in
connection therewith. The Portfolio's income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in hedging instruments derived by it with respect to its
business of investing in securities or foreign currencies, will qualify as
permissible income for its RIC investors under the requirement that at least 90%
of a RIC's gross income each taxable year consist of specified types of income.
However, income from the disposition by the Portfolio of hedging instruments
(other than those on foreign currencies) held for less than three months will be
subject to the requirement applicable to its RIC investors that less than 30% of
a RIC's gross income each taxable year consist of certain short-term gains
("Short-Short Limitation"). Income from the disposition of foreign currencies,
and hedging instruments on foreign currencies, that are not directly related to
the Portfolio's principal business of investing in securities (or options and
futures with respect thereto) also will be subject to the Short-Short Limitation
for its RIC investors if they are held for less than three months.
If the Portfolio satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether its RIC investors
satisfy the Short-Short Limitation. Thus, only the net gain (if any) from the
designated hedge will be included in gross income for purposes of that
limitation. The Portfolio will consider whether it should seek to qualify for
this treatment for its hedging transactions. To the extent the Portfolio does
not so qualify, it may be forced to defer the closing out of certain hedging
instruments beyond the time when it otherwise would be advantageous to do so, in
order for its RIC investors to qualify or continue to qualify as RICs.
UNDERWRITERS.
- -------------
Forum Financial Services, Inc., Two Portland Square, Portland, Maine 04101,
serves as the Trust's placement agent. The placement agent receives no
compensation for such placement agent services.
CALCULATIONS OF PERFORMANCE DATA.
- ---------------------------------
Not applicable.
FINANCIAL STATEMENTS.
- ---------------------
The Portfolio's financial statements for the fiscal period ended May 31, 1997,
including: statement of assets and liabilities, statement of operations,
statements of changes in net assets, notes to financial statements, schedules of
investments and independent auditor's report thereon are incorporated herein by
reference.
17
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
(1) Included in Part A
None
(2) Included in Part B
For Schroder U.S. Smaller Companies Portfolio:
Audited financial statements for the fiscal period ended May 31, 1997,
including: statement of assets and liabilities, statement of
operations, statements of changes in net assets, notes to financial
statements, schedules of investments and independent auditor's report
thereon. (The Annual Report of Schroder Capital Funds with respect to
Schroder U.S. Smaller Companies Portfolio, as filed with the
Securities and Exchange Commission on August 5, 1997 in conjunction
with the Annual Report of a series of Schroder Capital Funds
(Delaware) that invests in the Portfolio pursuant to Rule 30b2-1 under
the Investment Company Act of 1940, as amended, is incorporated herein
by reference.)
(b) Exhibits:
(1) Trust Instrument of Registrant (filed as Exhibit 1 to the
Registrant's Registration Statement and incorporated herein
by reference).
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) (a) Form of Investment Advisory Agreement between Registrant and
Schroder Capital Management International Inc. ("SCMI") with
respect to International Equity Fund, Schroder Emerging
Markets Fund Institutional Portfolio and Schroder U.S.
Smaller Companies Portfolio (filed as Exhibit 5 to Amendment
No. 1 to Registrant's Registration Statement and
incorporated herein by reference).
(b) Investment Advisory Agreement between Registrant and SCMI
with respect to Schroder International Smaller Companies
Portfolio (filed as Exhibit 5(b) to Amendment No. 4 to
Registrant's Registration Statement and incorporated herein
by reference).
(6) Not required.
(7) Not applicable.
(8) Form of Custodian Agreement between Registrant and The Chase
Manhattan Bank (filed as Exhibit 8 to Registrant's Initial
Registration Statement and incorporated herein by reference).
(9) (a) Administration Agreement between Registrant and Schroder
Fund Advisors Inc. with respect to International Equity
Fund, Schroder Emerging Markets Fund Institutional
<PAGE>
Portfolio, Schroder U.S. Smaller Companies Portfolio,
Schroder International Smaller Companies Portfolio and
Schroder Global Asset Allocation Portfolio (filed as Exhibit
9(a) to Amendment No. 4 to Registrant's Registration
Statement and incorporated herein by reference).
(b) Sub-administration Agreement between Registrant and Forum
Administrative Services, LLC with respect to International
Equity Fund, Schroder Emerging Markets Fund Institutional
Portfolio, Schroder U.S. Smaller Companies Portfolio,
Schroder International Smaller Companies Portfolio and
Schroder Global asset Allocation Portfolio (filed as Exhibit
9(b) to Amendment No. 4 to Registrant's Registration
Statement and incorporated herein by reference).
(e) Form of Transfer Agency and Portfolio Accounting Agreement
between Registrant and Forum Financial Corp. with respect to
International Equity Fund and Schroder Emerging Markets Fund
Institutional Portfolio (filed as Exhibit 9(c) to
Registrant's Initial Registration Statement and incorporated
herein by reference).
(f) Form of Placement Agent Agreement between Registrant and
Forum Financial Services, Inc. with respect to International
Equity Fund and Schroder Emerging Markets Fund Institutional
Portfolio (filed as Exhibit 9(d) to Registrant's Initial
Registration Statement and incorporated herein by
reference).
(10) Not required.
(11) Not required.
(12) Not required.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not applicable.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES AS OF OCTOBER 1, 1997.
Title of Class of Shares Number
Of Beneficial Interest Of Holders
- ---------------------- ----------
International Equity Fund 2
Schroder EM Core Portfolio 0
Schroder Emerging Markets Fund Institutional Portfolio 2
Schroder Global Growth Portfolio 0
Schroder International Smaller Companies Portfolio 2
Schroder U.S. Smaller Companies Portfolio 2
<PAGE>
ITEM 27. INDEMNIFICATION.
Registrant does not currently hold any directors' and officers' or
errors and omissions insurance policies. Registrant's trustees and officers are
covered under Registrant's fidelity bond purchased pursuant to Rule 17j-1 under
the Investment Company Act of 1940, as amended (the "Act").
The general effect of Article 5 of Registrant's Trust Instrument is to
indemnify existing or former trustees and officers of Registrant to the fullest
extent permitted by law against liability and expenses. There is no
indemnification if, among other things, any such person is adjudicated liable to
the Registrant or its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. This description is modified in its entirety by the provisions of
Article 5 of Registrant's Trust Instrument contained in this Registration
Statement as Exhibit 1 and incorporated herein by reference.
Provisions of Registrant's investment advisory agreements provide that
the respective investment adviser shall not be liable for any mistake of
judgment or in any event whatsoever, except for lack of good faith, provided
that nothing shall be deemed to protect, or purport to protect, the investment
adviser against any liability to Registrant or to Registrant's interestholders
to which the investment adviser would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of the investment
adviser's duties, or by reason of the investment adviser's reckless disregard of
its obligations and duties hereunder. This description is modified in its
entirety by the provisions of Registrant's Investment Advisory Agreement
contained in this Registration Statement as Exhibit 5 and incorporated herein by
reference. Likewise, Registrant has agreed to indemnify (1) Forum Financial
Services, Inc. in the Administration and Sub-Administration Agreements, (2)
Forum Financial Corp. in the Transfer Agency and Fund Accounting Agreement, and
(3) Forum Financial Services, Inc. in the Placement Agent Agreement for certain
liabilities and expenses arising out of their acts or omissions under the
respective agreements.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The following are the directors and principal officers of SCMI,
including their business connections of a substantial nature. The address of
each company listed, unless otherwise noted, is 33 Gutter Lane, London EC2V 8AS,
United Kingdom. Schroder Capital Management International Limited ("Schroder
Ltd.") is a United Kingdom affiliate of SCMI which provides investment
management services international clients located principally in the United
States.
David M. Salisbury. Chief Executive Officer, Director and Chairman of
Schroder Capital; Joint Chief Executive and Director of Schroder.
Richard R. Foulkes. Senior Vice President and Managing Director of
Schroder Capital.
John A. Troiano. Managing Director and Senior Vice President. Mr.
Troiano is also a Director of Schroder Ltd.
David Gibson. Senior Vice President and Director of Schroder Capital.
Director of Schroder Wertheim Investment Services Inc.
John S. Ager. Senior Vice President and Director of Schroder Capital.
Sharon L. Haugh. Senior Vice President and Director of Schroder
Capital, Director and Chairman of Schroder Advisors Inc.
Gavin D.L. Ralston. Senior Vice President and Director of Schroder
Capital.
Mark J. Smith. Senior Vice President and Director of Schroder Capital.
<PAGE>
Robert G. Davy. Senior Vice President. Mr. Davy is also a Director of
Schroder Ltd. and an officer of open end investment companies for
which SCMI and/or its affiliates provide investment services.
Jane P. Lucas. Senior Vice President and Director of Schroder Capital;
Director of Schroder Advisors Inc.; Director of Schroder Wertheim
Investment Services, Inc.
C. John Govett. Director of Schroder Capital; Group Managing Director
of Schroder Investment Management Ltd. And Director of Schroders plc.
Phillip J. Gould. Senior Vice President and Director of Schroder
Capital.
Louise Croset. First Vice President and Director of Schroder Capital.
Abdallah Nauphal, Group Vice President and Director.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Forum Financial Services, Inc. is the Registrant's placement
agent. Registrant has no underwriters.
(b) Inapplicable.
(c) Inapplicable.
ITEM 30. LOCATION OF BOOKS AND RECORDS.
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Act and the Rules thereunder are maintained
at the offices of Forum Administrative Services, LLC and its affiliates, Two
Portland Square, Portland, Maine 04104. The records required to be maintained
under Rule 31a-1(b)(1) with respect to journals of receipts and deliveries of
securities and receipts and disbursements of cash are maintained at the offices
of Registrant's custodian, which is named under "Custodian" in Part B to this
Registration Statement. The records required to be maintained under Rule
31a-1(b)(5), (6) and (9) are maintained at the offices of Registrant's
investment adviser, which is named in Item 28 hereof.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Registrant undertakes to contain in its Trust Instrument provisions for
assisting shareholder communications and for the removal of trustees
substantially similar to those provided for in Section 16(c) of the Act, except
to the extent such provisions are mandatory or prohibited under applicable
Delaware law.
<PAGE>
SIGNATURES
Pursuant to the requirements of 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 City of New York and
the State of New York on the 15th day of October, 1997.
SCHRODER CAPITAL FUNDS
By: /s/ Mark J. Smith
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Mark J. Smith
President