Merrimac Funds
Annual Report
December 31, 1997
<PAGE>
[Merrimac Funds letterhead]
February 5, 1998
Dear Shareholder:
We are pleased to provide you with our annual report of the Merrimac Cash Fund
and Treasury Fund. The period covered, January 1, 1997 to December 31, 1997, has
been stable and the operating results and Fund growth are noteworthy.
The investment objective of each Fund is to seek as high a level of current
income as is consistent with the preservation of capital and liquidity.
Investors Bank & Trust Company, the investment adviser to the Merrimac Master
Portfolio, The Bank of New York, sub-adviser for the Cash Portfolio and Aeltus
Investment Management, sub-adviser for the Treasury Portfolio have done a good
job maintaining great quality while giving us a better than average yield.
Additionally, the Merrimac Cash Fund has been rated "Aa" by Moody's.
On behalf of the Board of Trustees of the Merrimac Funds, I want to thank you
for your continued confidence and participation. We look forward to serving you
in the months and years ahead.
/s/ Sean P. Brennan
Sean P. Brennan
President
<PAGE>
Merrimac Funds
Statements of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Cash Fund Treasury Fund
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investment in corresponding Merrimac Portfolio, at value
(Note 1) $1,324,587,060 $73,916,346
Deferred organization expense (Note 1) 52,426 15,365
Prepaid assets 27,524 3,090
- ----------------------------------------------------------------------------------------------
Total assets $1,324,667,010 $73,934,801
- ----------------------------------------------------------------------------------------------
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders $ 6,548,526 $ 277,517
Accrued expenses 135,642 38,475
- ----------------------------------------------------------------------------------------------
Total liabilities $ 6,684,168 $ 315,992
- ----------------------------------------------------------------------------------------------
Net assets $1,317,982,842 $73,618,809
- ----------------------------------------------------------------------------------------------
Net Assets consist of
- ----------------------------------------------------------------------------------------------
Paid in capital $1,317,982,842 $73,621,399
Accumulated net realized loss on investments -- (2,590)
- ----------------------------------------------------------------------------------------------
Total net assets $1,317,982,842 $73,618,809
- ----------------------------------------------------------------------------------------------
Total Net Assets
- ----------------------------------------------------------------------------------------------
Premium Class 1,119,556,178 24,999,121
- ----------------------------------------------------------------------------------------------
Institutional Class $ 198,426,664 $48,619,688
- ----------------------------------------------------------------------------------------------
Shares Outstanding
- ----------------------------------------------------------------------------------------------
Premium Class 1,119,556,178 25,000,000
- ----------------------------------------------------------------------------------------------
Institutional Class 198,426,664 48,621,399
- ----------------------------------------------------------------------------------------------
Net asset value, maximum offer and redemption price per share $ 1.00 $ 1.00
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
1
<PAGE>
Merrimac Funds
Statements of Operations
<TABLE>
<CAPTION>
Cash Fund Treasury Fund
----------- --------------------
For the Period
April 2, 1997
(Commencement of
Year Ended Operations)
December to December 31,
31, 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income (Note 1)
- ----------------------------------------------------------------------------------------------------------------
Interest income allocated from Portfolio $75,327,353 $ 2,496,056
- ----------------------------------------------------------------------------------------------------------------
Expenses
- ----------------------------------------------------------------------------------------------------------------
Expenses allocated from Portfolio $2,115,481 $ 134,300
Accounting, transfer agency, and administration fees (Note 4) 133,615 4,640
Trustees fees and expenses 17,433 1,393
Insurance 31,002 2,400
Legal 22,733 9,368
Amortization of organization expenses (Note 1) 13,501 2,714
Audit and tax return preparation fees 12,773 7,500
Printing 7,444 1,500
Miscellaneous 3,062 150
- ----------------------------------------------------------------------------------------------------------------
Total expenses common to all classes $2,357,044 $ 163,965
Shareholder servicing fee - Institutional Class 367,250 69,237
- ----------------------------------------------------------------------------------------------------------------
Total expenses $2,724,294 $233,202
- ----------------------------------------------------------------------------------------------------------------
Net Investment Income $72,603,059 $2,262,854
Net Realized Loss on Investments from Portfolio -- (2,590)
- ----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations $72,603,059 $2,260,264
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
2
<PAGE>
Merrimac Funds
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Treasury
Cash Fund Fund
------------------------------ -----------
For the For the
Period Period
November 12, April 2,
1996 1997
(Commencement (Commencement
of of
Year Ended Operations) to Operations)
December 31, December 31, to December
1997 1996 31,1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
- ----------------------------------------------------------------------------------------------------------------------
Operations
Net investment income $ 72,603,059 $ 3,447,120 $ 2,262,854
Net realized loss from Portfolio -- -- (2,590)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 72,603,059 $ 3,447,120 $ 2,260,264
- ----------------------------------------------------------------------------------------------------------------------
Dividends from net investment income
Premium Class $ (64,735,055) $ (2,859,529) $ (938,202)
Institutional Class (7,868,004) (587,591) (1,324,65)
- ----------------------------------------------------------------------------------------------------------------------
Total dividends declared to shareholders $ (72,603,059) (3,447,120) (2,262,854)
- ----------------------------------------------------------------------------------------------------------------------
Capital share transactions (Note 8)
Proceeds from sale of shares $2,131,629,146 $1,072,725,924 255,160,513
Proceeds from shares reinvested 1,658,508 -- 202,292
Payment for redemption of shares (1,818,650,746) (69,379,990) (181,741,406)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets derived from share transactions $314,636,908 $1,003,345,934 $73,621,399
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets $314,636,908 $1,003,345,934 $73,618,809
Net Assets
Beginning of period 1,003,345,934 -- --
- ----------------------------------------------------------------------------------------------------------------------
End of period $1,317,982,842 $1,003,345,934 $73,618,809
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
3
<PAGE>
Merrimac Cash Fund
Financial Highlights
<TABLE>
<CAPTION>
Premium Class Institutional Class
------------------------------ -----------------------------
For the For the
Period Period
November 12, November 12,
1996 1996
(Commencement (Commencement
of of
Year Ended Operations) to Year Ended Operations) to
December December 31, December December 31,
31, 1997 1996 31, 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
- --------------------------------------------------------------------------------------------------------
Income from operations
- --------------------------------------------------------------------------------------------------------
Net investment income 0.055 0.006 0.052 0.006
- --------------------------------------------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------------------------------------------
From net investment income (0.055) (0.006) (0.052) (0.006)
- --------------------------------------------------------------------------------------------------------
Net asset value, end of period 1.000 $ 1.000 $ 1.000 $ 1.000
- --------------------------------------------------------------------------------------------------------
Total Return (1) 5.64% 5.42% 5.37% 5.17%
- --------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------
Net assets, end of period (thousands) $1,119,556 $875,936 $ 198,427 $127,410
Ratio of net expenses to average daily net
assets (2) 0.18% 0.15%+ 0.43% 0.40%+
Ratio of net investment income to average
daily net assets 5.49% 5.42%+ 5.24% 5.17%+
Ratio of net expenses to average daily net
assets, before waiver by the
Investment Adviser (2) 0.21% 0.24%+ 0.46% 0.49%+
</TABLE>
+ Annualized.
(1) Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions are assumed to be reinvested
at the net asset value on the payable date. Total return is computed on an
annualized basis.
(2) Includes each Fund's share of its corresponding Portfolio's allocated
expenses.
See notes to financial statements
4
<PAGE>
Merrimac Treasury Fund
Financial Highlights
<TABLE>
<CAPTION>
Premium Class Institutional Class
------------------------ --------------------
For the Period For the Period
April 2, 1997 April 2, 1997
(Commencement of (Commencement of
Operations) to Operations) to
December 31, 1997 December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $1.000 $ 1.000
- ----------------------------------------------------------------------------------------------------
Income from operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.038 0.036
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
From net investment income (0.038) (0.036)
- ----------------------------------------------------------------------------------------------------
Net asset value, end of period $1.000 $ 1.000
- ----------------------------------------------------------------------------------------------------
Total Return (1) 5.13% 4.87%
- ----------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (thousands) $24,999 $48,620
Ratio of net expenses to average daily net
assets +(2) 0.35% 0.60%
Ratio of net investment income to average
daily net assets + 5.01% 4.76%
</TABLE>
+ Annualized.
(1) Total return is calculated assuming a purchase at the net asset value on the
first day and a sale at the net asset value on the last day of each period
reported. Dividends and distributions are assumed to be reinvested at the
net asset value on the payable date. Total return is computed on an
annualized basis.
(2) Includes each Fund's share of its corresponding Portfolio's allocated
expenses.
See notes to financial statements
5
<PAGE>
Merrimac Funds
Notes to Financial Statements
December 31, 1997
1 Significant Accounting Policies
-----------------------------------------------------------------------------
The Merrimac Funds (the "Trust") was organized as a Delaware business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end, management investment company. The Merrimac Cash Fund (the "Cash
Fund) and the Merrimac Treasury Fund (the " Treasury Fund" and collectively,
the "Funds") are separate diversified investment portfolios or series of the
Trust. The Funds consist of three classes of shares, the Premium Class,
Institutional Class and the Placement Class.
The Funds each seek to achieve their investment objectives by investing all
of their investable assets in a corresponding portfolio of Merrimac Master
Portfolio (the "Portfolios"), an open-end management investment company. The
Merrimac Cash Portfolio and the Merrimac Treasury Portfolio have the same
investment objectives as their corresponding funds. At December 31, 1997, the
investment by the Cash Fund and the Treasury Fund represent ownership of
proportionate interests of 95.65% and 100% of the corresponding portfolios.
The performance of each Fund is directly affected by the performance of the
Portfolio into which it invests. The Portfolios seek to achieve a high level
of current income, consistent with the preservation of capital and liquidity.
The financial statements of the Portfolios are included elsewhere in this
report and should be read in conjunction with the Funds' financial
statements.
It is the policy of the Funds to maintain a net asset value of $1.00 per
share; the Funds have adopted certain investment, valuation, dividend and
distribution policies which conform to general industry practice, to enable
them to do so. However, there is no assurance that the Funds will be able to
maintain a stable net asset value.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A Investment Security Valuations - The Funds record investments in the
Portfolios at value. Valuation of securities by the Portfolios is discussed
in Note 1 of the Portfolios' Notes to Financial Statements, which are
included elsewhere in this report.
B Securities Transactions and Income - The Portfolios record securities
transactions as of the trade date. Interest income, including the accretion
of discount or the amortization of premium, is recognized when earned. Gains
or losses on sales of securities are calculated on the identified cost basis.
Each Fund's net investment income consists of its pro rata share of the net
investment income of its Portfolio, less all expenses of the Fund determined
in accordance with GAAP.
C Federal Income Taxes - Each Fund intends to qualify annually as a regulated
investment company under Subchapter M of the Internal Revenue Code, and thus
not be subject to income taxes to the extent that it distributes all of its
taxable income for its fiscal year and meets certain other requirements.
Accordingly, no provision for Federal income taxes is required.
D Deferred Organization Expense - Costs incurred by the Funds in connection
with their organization and initial registration are being amortized on a
straight-line basis over a five year period beginning at the commencement of
operations of each Fund.
E Expense Allocation - Expenses directly attributable to a Fund are charged
to that Fund. Expenses not directly attributed to a specific Fund are
allocated, based on relative net assets, to each of the Funds.
2 Dividends and Distributions to Shareholders
-----------------------------------------------------------------------------
Dividends on the shares of the Funds are declared each business day to
shareholders of record at 2:00 PM (New York time) on that day, and paid or
reinvested as of the last business day of the month. Distributions of net
realized gains, if any, are declared annually. Dividends and distributions
are determined in accordance with Federal income tax regulations, which may
differ from GAAP.
6
<PAGE>
Merrimac Funds
Notes to Financial Statements
December 31, 1997
3 Shareholder Servicing and Placement Plans
-----------------------------------------------------------------------------
The Trust has adopted Shareholder Servicing Plans with respect to the
Institutional Class and Placement Class under which certain service
organizations may be compensated for providing shareholder accounting and
other administrative services for their clients. The Institutional Class and
Placement Class will pay an annual fee of 0.25% of the value of the assets
that an organization services on behalf of its clients. Under a Placement
Agreement, the Placement Class will also pay an annual placement fee of 0.25%
of the value of the assets that an organization invests in the funds on
behalf of its clients. The Placement Class has not yet commenced operations.
4 Management Fee and Affiliated Transactions
-----------------------------------------------------------------------------
The Portfolios retain Investors Bank & Trust Company ("Investors Bank") as
investment adviser. Aeltus Investment Management, Inc. ("Aeltus") serves as
sub adviser of the Treasury Portfolio. The Bank of New York ("BNY") serves as
the Cash Portfolio's sub-adviser. The Funds pay no direct fees for such
services, but indirectly bear their pro rata share of the compensation paid
by the Portfolios. See Note 2 of the Portfolios' Notes to Financial
Statements which are included elsewhere in this report.
Investors Bank serves as administrator, custodian and transfer agent of the
Trust. IBT Fund Services (Canada) Inc., a subsidiary of Investors Bank,
provides fund accounting for the Trust. For these services, Investors Bank
and its subsidiary are paid a monthly fee at an annual rate of 0.01% of the
average daily net assets of each Fund.
Certain trustees and officers of the Trust are directors or officers of
Investors Bank. The Trust does not pay compensation to its trustees or
officers who are affiliated with the investment adviser.
5 Investment Transactions
-----------------------------------------------------------------------------
The Cash Fund's investments in and withdrawals from the Cash Portfolio for
the period from January 1, l997 to December 31, 1997 aggregated
$2,133,287,654 and $1,888,226,111 respectively. The Treasury Fund's
investments in and withdrawals from the Treasury Portfolio from its date of
inception, April 2, 1997, to December 31, 1997 aggregated $255,362,805 and
$183,805,625 respectively.
6 Line of Credit
-----------------------------------------------------------------------------
The Cash Fund has an agreement with BNY which allows the Fund an unsecured
line of credit for advances to the Fund of up to $100 million. The proceeds
of advances made under this line of credit may be used only for extraordinary
or emergency purposes and to provide temporary liquidity for redemptions of
the Fund's securities. Since the line of credit was established, there have
been no borrowings.
7 Federal Taxes
-----------------------------------------------------------------------------
The Treasury Fund has a capital loss carryforward expiring in December 2005
of $2,590.
7
<PAGE>
Merrimac Funds
Notes to Financial Statements
December 31, 1997
8 Shares of Beneficial Interest
-----------------------------------------------------------------------------
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest having a par value of $0.001 per share.
Transactions in Fund shares at $1.00 per share for each class were as
follows:
<TABLE>
<CAPTION>
Merrimac Cash Fund Merrimac Treasury Fund
------------------ ----------------------
Institutional
Premium Class Institutional Class Premium Class Class
---------------------------- ---------------------------- -------------- --------------
For the For the For the For the
Period Period Period Period
November November April 2, April 2,
12, 1996 12, 1996 1997 1997
(Commencement (Commencement (Commencement (Commencement
of of of of
Year Ended Operations) Year Ended Operations) Operations) Operations)
December to December December to December to December to December
31, 1997 31, 1996 31, 1997 31, 1996 31, 1996 31, 1996
------------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from
shares sold 1,359,423,000 916,936,001 772,206,146 155,789,923 25,000,000 230,160,513
Proceeds for
shares reinvested 303,648 -- 1,354,860 -- -- 202,292
Payment for shares
redeemed (1,116,106,470) (41,000,000) (702,544,276) (28,379,990) -- (181,741,406)
-------------- ----------- ------------ ------------ ---------- ------------
Net increase in
shares 243,620,178 875,936,001 71,016,730 127,409,933 25,000,000 48,621,399
============== ============ ============= ============= ========== ============
</TABLE>
At December 31, 1997, Investors Bank and the respective sub-advisers or their
affiliates were record holders of 97.1% and 100% of the outstanding shares of
the Cash Fund and the Treasury Fund, respectively. These holdings were, with
respect to Investors Bank and BNY, as agents for their respective clients.
- --------------------------------------------------------------------------------
Merrimac Treasury Fund Sources of Income (Unaudited)
The following table summarizes the percentage of income earned by the
Merrimac Treasury Fund in 1997 from various obligors. It is presented to
assist Fund shareholders in preparing state tax returns.
U.S. Treasury Obligations 80.42%
Federal Home Loan Bank Corporation 9.92%
Student Loan Marketing Association 5.81%
Federal Farm Credit Bank 3.03%
Federal Home Loan Mortgage Corporation 0.61%
Other 0.21%
- --------------------------------------------------------------------------------
8
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Board of Trustees of
The Merrimac Funds
In planning and performing our audit of the financial statements of the Merrimac
Cash Fund and the Merrimac Treasury Fund (the "Merrimac Funds") for the period
ended December 31, 1997, we considered its internal control, including control
activities for safeguarding securities, in order to determine our auditing
procedures for the purpose of expressing our opinion on the financial statements
and to comply with the requirements of Form N-SAR, and not to provide assurance
on the internal control.
The management of the Merrimac Funds is responsible for establishing and
maintaining internal control. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of controls. Generally, controls that are relevant to an audit pertain to
the entity's objective of preparing financial statements for external purposes
that are fairly presented in conformity with generally accepted accounting
principles. Those controls include the safeguarding of assets against
unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or fraud may occur
and not be detected. Also, projection of any evaluation of internal control to
future periods is subject to the risk that it may become inadequate because of
changes in conditions or that the effectiveness of the design and operation may
deteriorate.
Our consideration of internal control would not necessarily disclose all matters
in internal control that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a condition in which the design or operation of one or more
of specific internal control components does not reduce to a relatively low
level the risk that errors or fraud in amounts that would be material in
relation to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. However, we noted no matters involving internal control and
its operation, including controls for safeguarding securities, that we consider
to be material weaknesses as defined above at December 31, 1997.
This report is intended solely for the information and use of the board of
trustees and management of the Merrimac Funds and the Securities and Exchange
Commission.
/s/ Ernst & Young
Boston, MA
February 13, 1998
9
<PAGE>
Merrimac Cash Portfolio
Portfolio of Investments
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Yield to
Maturity
on
Principal Date of Maturity Value
Amount Description Purchase Date (Note 1A)
===================================================================================================================
<S> <C> <C> <C> <C>
Variable Rate Notes*-- 48.1%
$20,000,000 Abbey National Treasury Services 5.66% 01/02/98 $ 19,997,482
50,000,000 Asset Backed Securities Investment Trust 5.98 01/15/98 50,000,000
70,000,000 Australia & New Zealand Bank 5.65 01/02/98 69,982,572
54,000,000 Bank One Wisconsin 5.56 01/06/98 53,965,910
50,000,000 Bankers Trust Corporation 5.70 01/02/98 49,979,326
20,000,000 Barclays Bank PLC 5.66 01/02/98 19,998,019
50,000,000 Federal National Mortgage Association 5.61 01/02/98 49,988,770
50,000,000 Huntington National Bank 5.87 03/30/98 50,000,000
50,000,000 Merrill Lynch Company 5.70 01/02/98 50,000,000
50,000,000 Morgan Guaranty Trust Company 5.61 01/02/98 49,998,451
33,000,000 Paccar Financial Corporation 5.92 01/02/98 32,989,551
50,000,000 Pittsburgh National Corporation 6.19 01/02/98 49,974,172
50,000,000 Short Term Card Account Trust 6.22 01/15/98 50,000,000
20,000,000 Societe Generale 6.14 01/02/98 19,994,841
50,000,000 Societe Generale 5.93 01/02/98 49,998,835
Total Variable Rate Notes
(cost $666,867,929) $ 666,867,929
- --------------------------------------------------------------------------------------------------------------------
Certificates of Deposit, Yankee-- 19.9%
$70,000,000 Cassa Di Risparmio Delle Provincie Lombarde, SPA 5.76% 01/26/98 $ 70,000,000
70,000,000 Credit Suisse 5.63 01/05/98 69,999,883
65,000,000 Dai-Ichi Kangyo Bank, Limited 6.21 01/20/98 65,000,000
70,000,000 Deutsche Bank 5.64 01/12/98 70,000,210
Total Certificates of Deposit, Yankee
(cost $275,000,093) $ 275,000,093
- --------------------------------------------------------------------------------------------------------------------
Commercial Paper-- 15.8%
$50,000,000 Morgan Stanley Dean Witter 5.60% 02/06/98 $ 49,720,000
70,000,000 Sigma Finance Incorporated 5.65 01/26/98 69,725,347
30,000,000 Thames Asset Global Securitization 5.67 01/20/98 29,910,225
70,000,000 Variable Funding Capital Corporation 5.67 01/29/98 69,691,300
Total Commercial Paper
(cost $219,046,872) $ 219,046,872
- --------------------------------------------------------------------------------------------------------------------
Time Deposits-- 8.5%
$50,000,000 ABN-AMRO Time Deposit 6.75% 01/02/98 $ 50,000,000
67,342,000 National City Bank 5.25 01/02/98 67,342,000
Total Time Deposits
(cost $117,342,000) $117,342,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
10
<PAGE>
Merrimac Cash Portfolio
Portfolio of Investments
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Yield to
Maturity
on
Principal Date of Maturity Value
Amount Description Purchase Date (Note 1A)
===================================================================================================================
<S> <C> <C> <C> <C>
$100,000,000 Repurchase Agreements-- 7.2%
Prudential Securities, dated 12/31/97, with a
maturity value of $100,018,889, collateralized by U.S.
Government Agency Obligations with rates ranging
from 5.65% to 7.90% with maturity dates ranging from
1/1/25 to 2/1/37, and with an aggregate market value
of $100,037,778. (Cost $100,000,000) 6.80% 01/02/98 $ 100,000,000
- --------------------------------------------------------------------------------------------------------------------
Total Investments -- 99.5%
(cost $1,378,256,894) $ 1,378,256,894
- --------------------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities -- 0.5% 6,590,699
- --------------------------------------------------------------------------------------------------------------------
Net Assets -- 100.0% $1,384,847,593
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Variable rate securities - maturity dates on these types of
securities reflect the next interest rate reset date or, when
applicable, the final maturity date. Yield to maturity for these
securities is determined on the date of the most recent interest
rate change.
See notes to financial statements
11
<PAGE>
Merrimac Treasury Portfolio
Portfolio of Investments
December 31, 1997
<TABLE>
<CAPTION>
Yield to
Maturity on
Principal Date of Maturity Value
Amount Description Purchase Date (Note 1A)
=======================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury Obligations-- 76.7%
$ 5,730,000 U.S. Treasury Bill 5.22% 01/22/98 $ 5,712,569
5,000,000 U.S. Treasury Bill 5.20 01/22/98 4,984,848
5,000,000 U.S. Treasury Bill 5.12 01/22/98 4,985,067
10,000,000 U.S. Treasury Bill 5.16 03/05/98 9,909,700
7,000,000 U.S. Treasury Note 5.66 01/31/98 6,996,317
10,000,000 U.S. Treasury Note 5.51 02/15/98 10,020,878
3,000,000 U.S. Treasury Note 5.47 03/31/98 3,004,697
9,000,000 U.S. Treasury Note 5.66 04/15/98 9,059,274
2,000,000 U.S. Treasury Note 5.44 04/30/98 1,997,921
Total U.S. Treasury Obligations
(cost $56,671,271) $56,671,271
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Obligations-- 22.5%
$ 141,000 Federal Farm Credit Discount Note 5.80% 01/02/98 $ 140,932
525,000 Federal Farm Credit Discount Note 5.80 01/05/98 524,493
181,000 Federal Farm Credit Discount Note 5.95 01/13/98 180,611
244,000 Federal Farm Credit Discount Note 5.80 01/15/98 243,371
12,229,000 Federal Home Loan Bank 4.90 01/02/98 12,225,670
115,000 Federal Home Loan Bank 5.95 01/05/98 114,867
200,000 Federal Home Loan Bank 5.80 01/09/98 199,678
3,005,000 Federal Home Loan Bank 5.78 01/15/98 2,997,763
Total U.S. Government Agency Obligations
(cost $16,627,385) $16,627,385
- --------------------------------------------------------------------------------------------------------------------
Total Investments -- 99.2%
(cost $73,298,656) $73,298,656
- --------------------------------------------------------------------------------------------------------------------
Other assets in excess of liabilities -- 0.8% 617,690
- --------------------------------------------------------------------------------------------------------------------
Net Assets -- 100.0% $73,916,346
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
12
<PAGE>
Merrimac Master Portfolio
Statements of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Cash Portfolio Treasury Portfolio
- -----------------------------------------------------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments, at value (Note 1) $1,378,256,894 $73,298,656
Cash 981 11,154
Interest receivable 6,647,279 639,282
Deferred organization expense (Note 1) 47,202 6,261
Prepaid assets 44,678 2,625
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,384,997,034 $73,957,978
- -----------------------------------------------------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------------------------------------------------
Management fee payable (Note 2) $ 96,551 $ 9,680
Other accrued expenses 52,890 31,952
- -----------------------------------------------------------------------------------------------------------------
Total liabilities $ 149,441 $ 41,632
- -----------------------------------------------------------------------------------------------------------------
Net assets applicable to investors' beneficial interests $1,384,847,593 $73,916,346
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Statements of Operations
<TABLE>
<CAPTION>
Cash Portfolio Treasury Portfolio
---------------- --------------------
For the Period
April 2, 1997
(Commencement of
Year Ended Operations)
December 31, to December 31,
1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income
- -----------------------------------------------------------------------------------------------------------------
Interest $ 77,144,989 $ 2,496,056
- -----------------------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------------------
Management fee (Note 2) 2,314,064 $ 79,035
Trustee fees and expenses 59,494 6,485
Transaction fees 24,000 6,475
Legal 33,329 9,851
Audit and tax return preparation fees 28,071 22,807
Amortization of organization expense (Note 1) 12,150 1,368
Insurance 53,700 6,849
Other 17,705 1,430
- -----------------------------------------------------------------------------------------------------------------
Total expenses 2,542,513 $ 134,300
Less: Management fee waived by investment adviser (Note 2) (381,468) --
- -----------------------------------------------------------------------------------------------------------------
Net Expenses 2,161,045 $ 134,300
- -----------------------------------------------------------------------------------------------------------------
Net Investment Income $74,983,944 $2,361,756
Net Realized Loss on Investments -- (2,590)
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations $74,983,944 $2,359,166
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
13
<PAGE>
Merrimac Master Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Treasury
Cash Portfolio Portfolio
--------------------------------- ---------------
For the Period For the Period
November 21, 1996 April 2, 1997
(Commencement of (Commencement of
Year Ended Operations) to Operations) to
December 31, 1997 December 31, 1996 December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
Operations
Net investment income $ 74,983,944 $ 3,493,905 $ 2,361,756
Net realized loss on investments -- -- (2,590)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations $ 74,983,944 $ 3,493,905 $ 2,359,166
- -------------------------------------------------------------------------------------------------------------------------------
Transactions in investors' beneficial interest
Contributions $ 2,193,287,654 $1,072,725,924 $255,362,805
Withdrawals (1,889,734,150) (69,909,684) (183,805,625)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase from investors' transactions $ 303,553,504 $1,002,816,240 $ 71,557,180
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets $ 378,537,448 $1,006,310,145 $73,916,346
Net Assets
Beginning of period 1,006,310,145 -- --
- -------------------------------------------------------------------------------------------------------------------------------
End of period $ 1,384,847,593 $1,006,310,145 $73,916,346
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplementary Data
<TABLE>
<CAPTION>
Treasury
Cash Portfolio Portfolio
--------------------------------- ---------------
For the Period For the Period
November 12, 1996 April 2, 1997
(Commencement of Commencement of
Year Ended Operations) to Operations) to
December 31, 1997 December 31, 1996+ December 31, 1997+
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratios to Average Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses 0.16% 0.12% 0.29%
Net investment income 5.51% 5.45% 5.06%
Net expenses, before waiver by the Investment Adviser 0.19% 0.21% NA
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000s omitted) $ 1,384,848 $ 1,006,310 $ 73,919
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Annualized.
See notes to financial statements
14
<PAGE>
Merrimac Master Portfolio
Notes to Financial Statements
December 31, 1997
1 Significant Accounting Policies
------------------------------------------------------------------------------
The Merrimac Master Portfolio (the "Portfolio Trust") was organized as a
common law trust under the laws of the State of New York and is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end, diversified, management investment company with its principal
office in the Cayman Islands. The Merrimac Cash Portfolio (the "Cash
Portfolio") and the Merrimac Treasury Portfolio (the "Treasury Portfolio" and
collectively the "Portfolios") are separate diversified investment series of
the Portfolio Trust.
The following is a summary of significant accounting policies followed by the
Portfolio Trust in the preparation of its financial statements. The
preparation of financial statements in accordance with generally accepted
accounting principles in the United States, requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A Investment Security Valuations - Portfolio securities are valued using the
amortized cost method, which involves initially valuing an investment at its
cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value. Each Portfolio's use of amortized cost is subject to compliance with
certain conditions specified under Rule 2a-7 of the 1940 Act.
B Securities Transactions and Income - Interest income consists of interest
accrued and discount earned (including both original issue and market
discount) less premium amortized on the investments of the Portfolios,
accrued ratably to the date of maturity. Purchases, maturities and sales of
money market instruments are accounted for on the date of transaction.
Expenses of the Portfolios are accrued daily. All investment income,
expenses, and realized and unrealized capital gains and losses of the
Portfolios are allocated pro rata to their investors.
C Federal Income Taxes - Each Portfolio is considered a partnership under the
U.S. Internal Revenue Code. Accordingly, no provision for federal income
taxes is necessary. Each Portfolio also intends to conduct its operations
such that each investor will be able to qualify as a regulated investment
company.
D Repurchase Agreements - It is the policy of the Cash Portfolio to require
the custodian bank to take possession of all securities held as collateral in
support of repurchase agreement investments. Additionally, procedures have
been established by the Cash Portfolio to monitor, on a daily basis, the
market value of the repurchase agreement's underlying investments to ensure
the existence of a proper level of collateral. The Treasury
Portfolio does not invest in repurchase agreements.
E Deferred Organizational Expense - Costs incurred by each Portfolio in
connection with its organization and initial registration are being
amortized, on a straight-line basis over a five year period beginning at the
commencement of operations of that portfolio.
2 Management Fee and Affiliated Transactions
-----------------------------------------------------------------------------
The Portfolios retain Investors Bank & Trust Company ("Investors Bank") as
investment adviser to continuously review and monitor the Portfolios'
investment program. The Bank of New York ("BNY") serves as sub adviser of the
Cash Portfolio. Aeltus Investment Management, Inc. ("Aeltus") serves as
sub-adviser of the Treasury Portfolio. For its services to the Portfolios,
each sub-adviser is paid a monthly fee by Investors Bank computed at an
annual rate of .08% of the average daily net assets of the Portfolio. The
Portfolio does not pay a fee directly to either sub-adviser for such
services.
Investors Bank serves as custodian for the Portfolio Trust. Investors Fund
Services (Ireland) Limited, a subsidiary of Investors Bank, serves as
administrator. IBT Fund Services (Canada) Inc., a subsidiary of Investors
Bank, serves as fund accounting agent and transfer agent. For services to the
Portfolio Trust, Investors Bank and its subsidiaries are paid a monthly fee
at an annual rate of 0.17% of the average daily net assets of the Portfolios.
Investors Bank and BNY voluntarily collectively reduced their fees by
$381,468 for the Cash Portfolio during 1997.
Certain trustees and officers of the Portfolio Trust are directors or
officers of Investors Bank. The Portfolio Trust does not pay compensation to
its trustees or officers who are affiliated with the investment adviser.
3 Investment Transactions
-----------------------------------------------------------------------------
Purchases and combined maturities and sales of money market instruments
aggregated $53,268,692,294 and $52,896,262,711, respectively for the Cash
Portfolio for the year ended December 31, 1997 and $1,605,211,489 and
$1,531,912,833, respectively for the Treasury Portfolio for the period April
2, 1997 through December 31, 1997.
15
<PAGE>
Report of Ernst & Young, Independent Auditors
To the Board of Trustees of
The Merrimac Master Portfolio
In planning and performing our audit of the financial statements of the Merrimac
Cash Portfolio and the Merrimac Treasury Portfolio, two of the series comprising
the Merrimac Master Portfolio (collectively the "Master Portfolio") for the
period ended December 31, 1997, we considered its internal control, including
control activities for safeguarding securities, in order to determine our
auditing procedures for the purpose of expressing our opinion on the financial
statements and to comply with the requirements of Form N-SAR, and not to provide
assurance on the internal control.
The management of the Master Portfolio is responsible for establishing and
maintaining internal control. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of controls. Generally, controls that are relevant to an audit pertain to
the entity's objective of preparing financial statements for external purposes
that are fairly presented in conformity with accounting principles generally
accepted in the United States of America. Those controls include the
safeguarding of assets against unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or fraud may occur
and not be detected. Also, projection of any evaluation of internal control to
future periods is subject to the risk that it may become inadequate because of
changes in conditions or that the effectiveness of the design and operation may
deteriorate.
Our consideration of internal control would not necessarily disclose all matters
in internal control that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a condition in which the design or operation of one or more
of specific internal control components does not reduce to a relatively low
level the risk that errors or fraud in amounts that would be material in
relation to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. However, we noted no matters involving internal control and
its operation, including controls for safeguarding securities, that we consider
to be material weaknesses as defined above at December 31, 1997.
This report is intended solely for the information and use of the board of
trustees and management of the Master Portfolio and the Securities and Exchange
Commission.
/s/ Ernst & Young
Cayman Islands, BWI
February 13, 1998
16
