As filed with the Securities and Exchange Commission on April 30, 1998
File No. 811-7993
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
SCHRODER CAPITAL FUNDS II
Two Portland Square
Portland, Maine 04101
207-879-1900
Cheryl O. Tumlin, Esq.
Forum Financial Services, Inc.
Two Portland Square
Portland, Maine 04101
Copies to:
Timothy W. Diggins, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
Alexandra Poe, Esq.
Schroder Capital Management International Inc.
787 Seventh Avenue, 34th Floor
New York, New York 10019
EXPLANATORY NOTE
This Registration Statement is being filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. Beneficial interests in
the series of Registrant are not being registered under the Securities Act of
1933, as amended, because such interests will be issued solely in private
placement transactions that do not involve any "public offering" within the
meaning of Section 4(2) of that act. Investments in Registrant's series may only
be made by certain qualified investors, whether organized within or without the
United States (excluding S corporations, partnerships, and grantor trusts
beneficially owned by any individuals, S corporations or partnerships). This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any beneficial interests in any series of Registrant.
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SCHRODER CAPITAL FUNDS II
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SCHRODER INTERNATIONAL BOND PORTFOLIO
PART A
(PRIVATE PLACEMENT MEMORANDUM)
APRIL 30, 1998
INTRODUCTION
Schroder Capital Funds II (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. The Trust
currently offers one portfolio, Schroder International Bond Portfolio (the
"Portfolio"). Additional portfolios may be added in the future. This Part A
relates 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 REGISTRANT
The Trust was organized as a business trust under the law of the State of
Delaware on December 27, 1996 under a Trust Instrument dated December 26, 1996.
The Trust has an unlimited number of authorized Interests. The assets belonging
to a portfolio, now existing or later created, belong only to that portfolio and
are charged with the liabilities of, and all expenses, costs, charges and
reserves attributable to, that portfolio. The Portfolio is a non-diversified
series of the Trust. See "Other Investment Practices and Risk Considerations
- --Non-Diversification and Geographic Concentration."
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.
An investor may subscribe for a beneficial interest in the Portfolio by
contacting Forum Financial Services, Inc., the Trust's placement agent, at Two
Portland Square, Portland, Maine 04101, (207) 879-1900, for a complete
subscription package, including a subscription agreement. The Trust and the
placement agent reserve the right to refuse to accept any subscription for any
reason. The Trust has filed with the Securities and Exchange Commission a second
half (Part B) to this Memorandum which contains more detailed information about
the Trust and the Portfolio. The Part B, which is incorporated into this
Memorandum by reference, also is available from the placement agent.
THE TRUST'S SECURITIES DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM ARE NOT
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE. INTERESTS MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER: (1) THE TERMS OF THE TRUST'S TRUST
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INSTRUMENT, AND (2) THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
OR FOREIGN SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
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TABLE OF CONTENTS
Introduction..................................................................1
General Description of Registrant.............................................1
Investment Objective and Policies.............................................2
Other Investment Practices and Risk Considerations............................3
Management of the Trust.......................................................9
Capital Stock and Other Securities............................................11
Purchase of Securities........................................................11
Redemption or Repurchase......................................................12
Pending Legal Proceedings.....................................................13
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is to seek a high rate of total return. The
Portfolio normally invests substantially all of its assets in debt securities
and debt-related investments of issuers domiciled outside the United States.
"Total return" consists of current income, including interest payments and
discount accruals, plus any increases in the values of the Portfolio's
investments (less any decreases in the values of any of its investments and
amortizations of premiums). SCMI considers expected changes in foreign currency
exchange rates in determining the anticipated returns on securities denominated
in foreign currencies.
The Portfolio may invest in debt securities of foreign governments (including
provinces or municipalities) and their agencies and instrumentalities, debt
securities of supranational organizations, and debt securities of private
issuers. These bonds may pay interest at fixed, variable, or floating rates.
Certain securities in which the Portfolio invests may be convertible into common
or preferred stock, or they may be traded together with warrants for the
purchase of common stock. The rate of return on some debt obligations may be
linked to indices or stock prices or indexed to the level of exchange rates
between the U.S. dollar and a foreign currency or currencies. The Portfolio may
invest up to 10% of its net assets in lower quality, high-yielding debt
securities. See "Other Investment Practices and Risk Considerations --
Lower-Rated Debt Securities." The Portfolio may also invest in loan
participation interests (which involve certain risks, including credit and
liquidity risks). See "Investment Objective and Policies -- Loan Participation
Interests" in Part B.
The Portfolio normally invests in securities of issuers in at least five
countries other than the United States, although there is no limit on the amount
of the Portfolio's assets that may be invested in securities of issuers
domiciled in any one country. When the Portfolio has invested a substantial
portion of its assets in the securities of companies domiciled in a single
country, it will be more susceptible to the risks of investing in that country
than would a fund investing in a geographically more diversified portfolio. At
times, the Portfolio may invest a substantial portion of its assets in
securities of issuers in emerging market countries, which involves special
risks. See "Other Investment Practices and Risk Considerations -- Foreign
Securities."
Generally, the Portfolio's average maturity will be shorter when SCMI expects
interest rates in markets where the Portfolio has invested to rise, and longer
when SCMI expects interest rates in those markets to fall. SCMI may use various
techniques to increase the interest-rate sensitivity of the Portfolio's
portfolio, including transactions in futures and options on futures,
interest-rate swaps, caps, floors, and short sales of securities.
Debt securities are subject to market risk (the fluctuation of market value in
response to changes in interest rates) and to credit risk (the risk that the
issuer may become unable or unwilling to make timely payments of principal and
interest).
SCMI believes that active currency management, through the use of any of the
foreign currency exchange transactions described below, can enhance portfolio
returns through opportunities arising from, for example, interest-rate
differentials between securities denominated in different currencies or changes
in value between
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currencies. SCMI also believes that active currency management can be employed
as an overall portfolio risk management tool. Foreign currency management can
also provide increased overall portfolio risk diversification. See "Other
Investment Practices and Risk Considerations -- Foreign Currency Exchange
Transactions." The Portfolio may also borrow money to invest in additional
securities. Use of leverage involves special risks. See "Other Investment
Practices and Risk Considerations -- Leverage."
There can be no assurance that the Portfolio will achieve its investment
objective.
The Portfolio's investment objective may not be changed without interestholder
approval. The investment policies of the Portfolio may, unless otherwise
specifically stated, be changed by the Trust's Board of Trustees without a vote
of the interestholders. All percentage limitations on investments will apply at
the time of investment and will not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of the investment.
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Portfolio may engage in the following investment practices, each of which
involves certain special risks. Part B contains more detailed information about
these practices (some of which may be considered "derivative" investments).
FOREIGN SECURITIES. Investments in foreign securities entail certain risks.
There may be a possibility of nationalization or expropriation of assets,
confiscatory taxation, political or financial instability, and diplomatic
developments that could affect the value of the Portfolio's investments in
certain foreign countries. Since foreign securities are normally denominated and
traded in foreign currencies, the values of the Portfolio's assets may be
affected favorably or unfavorably by currency exchange rates, currency exchange
control regulations, foreign withholding taxes and restrictions or prohibitions
on the repatriation of foreign currencies. There may be less information
publicly available about a foreign issuer than about a U.S. issuer, and foreign
issuers are not generally subject to accounting, auditing, and financial
reporting standards and practices comparable to those in the United States. The
securities of some foreign issuers are less liquid and at times more volatile
than securities of comparable U.S. issuers. Foreign brokerage commissions and
other fees are also generally higher than in the United States. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in payment or delivery of securities or in the recovery of the Portfolio's
assets held abroad) and expenses not present in the settlement of domestic
investments.
In addition, legal remedies available to investors in certain foreign countries
may be more limited than those available with respect to investments in the
United States or in other foreign countries. The willingness and ability of
sovereign issuers to pay principal and interest on government securities depends
on various economic factors, including, without limitation, the issuer's balance
of payments, overall debt level, and cash-flow considerations related to the
availability of tax or other revenues to satisfy the issuer's obligations. If a
foreign governmental entity is unable or unwilling to meet its obligations on
the securities in accordance with their terms, the Portfolio may have limited
recourse available to it in the event of default. The laws of some foreign
countries may limit the Portfolio's ability to invest in securities of certain
issuers located in those foreign countries. Special tax considerations apply to
foreign securities. There is no limit on the amount of the Portfolio's assets
that may be invested in foreign securities.
If the Portfolio purchases securities denominated in foreign currencies, a
change in the value of any such currency against the U.S. dollar will result in
a change in the U.S. dollar value of the Portfolio's assets and the Portfolio's
income available for distribution. In addition, although at times most of the
Portfolio's income may be received or realized in these currencies, the
Portfolio will be required to compute and distribute its income in U.S. dollars.
Therefore, if the exchange rate for any such currency declines after the
Portfolio's income has been earned and translated into U.S. dollars but before
payment, the Portfolio could be required to liquidate portfolio securities to
make such distributions. Similarly, if an exchange rate declines between the
time the Portfolio incurs expenses in U.S. dollars and the time such expenses
are paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency
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of such expenses at the time they were incurred. The Portfolio may buy or sell
foreign currencies and options and futures contracts on foreign currencies for
hedging purposes in connection with its foreign investments.
In determining whether to invest in debt securities of foreign issuers, SCMI
considers the likely impact of foreign taxes on the net yield available to the
Portfolio and its interestholders. Income received by the Portfolio from sources
within foreign countries may be reduced by withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Any such taxes paid by the Portfolio
will reduce its net income available for distribution to interestholders.
The Portfolio may invest some or all of its assets in securities of issuers in
emerging market countries. The securities' prices and relative currency values
of emerging market investments are subject to greater volatility than those of
issuers in many more developed countries. Investments in emerging market
countries are subject to the same risks applicable to foreign investments
generally, although those risks may be increased due to conditions in such
countries. For example, the securities markets and legal systems in emerging
market countries may only be in a developmental stage and may provide few, or
none, of the advantages or protections of markets or legal systems available in
more developed countries. Although many of the securities in which the Portfolio
may invest are traded on securities exchanges, they may trade in limited volume,
and the exchanges may not provide all of the conveniences or protections
provided by securities exchanges in more developed markets. The Portfolio may
also invest a substantial portion of its assets in securities traded in the
over-the-counter markets in such countries and not on any exchange, which may
affect the liquidity of the investment and expose the Portfolio to the credit
risk of its counterparties in trading those investments. Emerging market
countries may experience extremely high rates of inflation, which may adversely
affect these countries' economies and securities markets.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Changes in currency exchange rates will
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 may engage in foreign currency exchange transactions to protect
against uncertainty in the level of future exchange rates. Although the strategy
of engaging in foreign currency exchange transactions could reduce the risk of
loss due to a decline in the value of the hedged currency, it could also limit
the potential gain from an increase in the value of the currency.
In particular, the Portfolio may enter into foreign currency exchange
transactions to protect against a change in exchange ratios that may occur
between the date on which the Portfolio contracts to trade a security and the
settlement date ("transaction hedging") or in anticipation of placing a trade
("anticipatory hedging"); to "lock in" the U.S. dollar value of interest and
dividends to be paid in a foreign currency; or to hedge against the possibility
that a foreign currency in which portfolio securities are denominated or quoted
may suffer a decline against the U.S. dollar ("position hedging"). The Portfolio
may also enter into forward contracts to adjust the Portfolio's exposure to
various foreign currencies, either pending anticipated investments in securities
denominated in those currencies or as a hedge against anticipated market
changes.
SCMI may seek to enhance the Portfolio's investment return through active
currency management. SCMI may buy or sell foreign currencies for the Portfolio,
on a spot or forward basis, in an attempt to profit from inefficiencies in the
pricing of various currencies or of debt securities denominated in those
currencies.
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 incurs foreign exchange expenses
in converting assets from one currency to another. In addition, the Portfolio
may, to a limited extent, purchase forward contracts to increase exposure in
foreign currencies that are expected to appreciate and thereby increase total
return.
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
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contract. Forward contracts do not eliminate fluctuations in the underlying
prices of securities which the Portfolio owns or intends to purchase or sell,
and expose the Portfolio to the risk that the counterparty is unable to perform.
Forward contracts are not exchange traded, and there can be no assurance that a
liquid market will exist at a time when the Portfolio seeks to close out a
forward contract. Currently, only a limited market, if any, exists for exchange
transactions relating to currencies in certain emerging markets or to securities
of issuers domiciled or principally engaged in business in certain emerging
markets. This may limit the Portfolio's ability to hedge its investments in
those markets. These contracts involve a risk of loss if SCMI fails to predict
accurately changes in relative currency values, the direction of stock prices or
interest rates and other economic factors.
From time to time, the Portfolio's currency hedging transactions may call for
the delivery of one foreign currency in exchange for another foreign currency
and may at times involve currencies in which its portfolio securities are not
then denominated ("cross hedging"). From time to time, the Portfolio may also
engage in "proxy" hedging, whereby the Portfolio would seek to hedge the value
of portfolio holdings denominated in one currency by entering into an exchange
contract on a second currency, the valuation of which SCMI believes correlates
to the value of the first currency. Cross hedging and proxy hedging transactions
involve the risk of imperfect correlation between changes in the values of the
currencies to which such transactions relate and changes in the value of the
currency or other asset or liability that is the subject of the hedge.
LEVERAGE. The Portfolio may borrow money by engaging in reverse repurchase
agreements to invest in additional securities. "Reverse" repurchase agreements
generally involve the sale by the Portfolio of securities held by it and an
agreement to repurchase the securities at an agreed-upon price, date, and
interest payment. The Portfolio may engage in forward commitments, described
below and in Part B, which may have the same economic effect as if the Portfolio
had borrowed money.
The use of borrowed money, known as "leverage," increases the Portfolio's market
exposure and risk and may result in losses. When the Portfolio has borrowed
money for leverage and its investments increase or decrease in value, its net
asset value will normally increase or decrease more than if it had not borrowed
money for this purpose. The interest that the Portfolio must pay on borrowed
money will reduce its net investment income, and may also either offset any
potential capital gains or increase any losses. The Portfolio will not always
borrow money for investments, and the extent to which the Portfolio will borrow
money, and the amount it may borrow, depend on market conditions and interest
rates. Successful use of leverage depends on SCMI's ability to predict market
movements correctly. The amount of leverage that can exist at any one time will
not exceed one-third of the value of the Portfolio's total assets (including the
amount borrowed). The Portfolio may be required to segregate certain assets
against its obligations under reverse repurchase agreements entered into by it.
LOWER-RATED DEBT SECURITIES. The Portfolio may invest in lower quality,
high-yielding debt securities rated below investment grade and in unrated debt
securities determined by SCMI to be of comparable quality. Lower-rated debt
securities (commonly called "junk bonds") are considered to be of poor standing
and predominantly speculative. Securities in the lowest rating categories may
have extremely poor prospects of attaining any real investment standing, and
some of those securities in which the Portfolio may invest may be in default.
The rating services' descriptions of securities in the lower rating categories,
including their speculative characteristics, are set forth in Appendix A to Part
B.
In addition, lower-rated securities reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. Changes by
recognized rating services in their ratings of any fixed-income security and in
the perceived ability of an issuer to make payments of interest and principal
may also affect the value of these investments. The inability (or perceived
inability) of issuers to make timely payments of interest and principal would
likely make the values of securities held by the Portfolio more volatile and
could limit the Portfolio's ability to sell its securities at prices
approximating the values the Portfolio had placed on such securities. In the
absence of a liquid trading market for securities held by it, the Portfolio may
be unable at times to establish the fair value of such securities. The rating
assigned to a security by a rating agency does not reflect an assessment of the
volatility of the security's market value or of the liquidity of an investment
in the security.
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The Portfolio may at times invest in so-called "zero coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity, rather than at intervals
during the life of the security. Payment-in-kind bonds allow the issuer, at its
option, to make current interest payments on the bonds either in cash or in
additional bonds. The values of zero-coupon bonds and payment-in-kind bonds are
subject to greater fluctuation in response to changes in market interest rates
than bonds which pay interest currently, and may involve greater credit risk
than such bonds. From time to time, 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. Brady Bonds have been issued only recently
and, therefore, do not have a long payment history.
The Portfolio will not necessarily dispose of a security when its debt rating is
reduced below its rating at the time of purchase, although SCMI will monitor the
investment to determine whether continued investment in the security will assist
in meeting the Portfolio's investment objective.
FLOATING- AND VARIABLE-RATE SECURITIES AND INVERSE FLOATERS. The Portfolio may
invest in floating- and variable-rate securities, which are securities that
provide for a periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon an interest-rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or they may be event based, such as based on a change in
the prime rate, or tied to another interest rate, such as a money market index
or Treasury bill rate.
The Portfolio also may invest in inverse floating-rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. A higher degree of leverage may be
associated with greater volatility in the market value of an inverse floater.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities.
OPTIONS AND FUTURES TRANSACTIONS. The Portfolio may engage in a variety of
transactions involving the use of options and futures contracts. The Portfolio
may engage in such transactions for hedging purposes or, to the extent permitted
by applicable law, to increase its current return.
The Portfolio may seek to increase its current return by writing covered call
options and covered put options on its portfolio securities or other securities
in which it may invest. The Portfolio receives a premium from writing a call or
put option, which increases the Portfolio's return if the option expires
unexercised or is closed out at a net profit. The Portfolio may also buy and
sell put and call options on such securities for hedging purposes. When the
Portfolio writes a call option on a portfolio security, it gives up the
opportunity to profit from any increase in the price of the security above the
exercise price of the option; when it writes a put option, the Portfolio takes
the risk that it will be required to purchase a security from the option holder
at a price above the current market price of the security. The Portfolio may
terminate an option that it has written prior to its expiration by entering into
a closing purchase transaction in which it purchases an option having the same
terms as the option written. The Portfolio may also from time to time buy and
sell combinations of put and call options on the same underlying security to
earn additional income.
The Portfolio may buy and sell index futures contracts. An "index future" is a
contract to buy or sell units of a particular index at an agreed price on a
specified future date. Depending on the change in value of the index between the
time when the Portfolio enters into and terminates an index future transaction,
the Portfolio may realize a gain or loss. The Portfolio may also purchase
warrants, issued by banks or other financial institutions, whose values are
based on the values from time to time of one or more securities indices.
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The Portfolio may buy and sell futures contracts on U.S. Government securities
or other debt securities. A futures contract on a debt security is a contract to
buy or sell a certain amount of the debt security at an agreed price on a
specified future date. Depending on the change in the value of the security when
the Portfolio enters into and terminates a futures contract, the Portfolio
realizes a gain or loss.
The Portfolio may purchase and sell options on futures contracts or on
securities indices in addition to or as an alternative to purchasing and selling
futures contracts.
The Portfolio may also purchase and sell put and call options on foreign
currencies, futures contracts on foreign currencies, and options on foreign
currency futures contracts as an alternative, or in addition to, the foreign
currency exchange transactions described above. Such transactions are similar to
options and futures contracts on securities, except that they typically
contemplate that one party to a transaction will deliver one foreign currency to
the other in return for another currency (which may or may not be the U.S.
dollar).
RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Options and futures
transactions involve costs and may result in losses. The use of options and
futures involves certain special risks, including the risks that the Portfolio
may be unable at times to close out such positions, that hedging transactions
may not accomplish their purpose because of imperfect market correlations, or
that SCMI may not forecast market movements correctly.
The effective use of options and futures strategies is dependent on, among other
things, the Portfolio's ability to terminate options and futures positions at
times when SCMI deems it desirable to do so. Although the Portfolio will enter
into an option or futures contract position only if SCMI believes that a liquid
secondary market exists for that option or futures contract, there is no
assurance that the Portfolio will be able to effect closing transactions at any
particular time or at an acceptable price.
The Portfolio generally expects that its options and futures contract
transactions will be conducted on recognized exchanges. In certain instances,
however, the Portfolio may purchase and sell options in the over-the-counter
markets. The Portfolio's ability to terminate options in the over-the-counter
markets may be more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to the Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of SCMI,
the pricing mechanism and liquidity of the over-the-counter markets are
satisfactory and the participants are responsible parties likely to meet their
contractual obligations. The Portfolio will treat over-the-counter options (and,
in the case of options sold by the Portfolio, the underlying securities held by
the Portfolio) as illiquid investments as required by applicable law.
The use of options and futures strategies also involves the risk of imperfect
correlation between movements in the prices of options and futures contracts and
movements in the value of the underlying securities, index, or currency, or in
the prices of the securities or currency that are the subject of a hedge. The
successful use of these strategies further depends on the ability of SCMI to
forecast market movements correctly.
Because the markets for certain options and futures contracts in which the
Portfolio will invest (including markets located in foreign countries) are
relatively new and still developing and may be subject to regulatory restraints,
the Portfolio's ability to engage in transactions using such investments may be
limited. The Portfolio's ability to engage in hedging transactions may be
limited by certain regulatory and tax considerations. The Portfolio's hedging
transactions may affect the character or amount of its distributions. The tax
consequences of certain hedging transactions have been modified by the Taxpayer
Relief Act of 1997.
For more information about any of the options or futures portfolio transactions
described above, see Part B.
SWAP AGREEMENTS. The Portfolio may enter into interest-rate, index, and
currency-exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
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typical "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount" (I.E.,
the dollar amount invested at a particular interest rate, in a particular
foreign currency, or in a "basket" of securities representing a particular
index). Commonly used swap agreements include interest-rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest-rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor"; and interest-rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding a given minimum or maximum. The use of swap agreements
is a highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If SCMI is incorrect in its forecast of market values, interest rates, exchange
rates, or other factors, the Portfolio's investment performance would be less
favorable than if the Portfolio had not used such agreements.
SHORT SALES. The Portfolio may engage in "short sales", which are transactions
in which the Portfolio sells a security that it does not own in anticipation of
a decline in the market value of that security. To complete the transaction, the
Portfolio must borrow the security to make delivery to the purchaser. The
Portfolio is then obligated to replace the borrowed security through a purchase
of it at the market price at the time of replacement. The price at that time may
be more or less than the price at which the security was sold by the Portfolio.
The Portfolio incurs a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. The Portfolio realizes a gain if the
security declines in price between those dates. The result is the opposite of
what one would expect from a cash purchase of a long position in a security.
Until the security is replaced, the Portfolio is required to pay the lender
amounts equal to any dividend that accrues during the period of the loan. To
borrow the security, the Portfolio also may be required to pay a premium or
specified amounts in lieu of interest. The amount of any gain is decreased, and
the amount of any loss is increased, by any premium or amounts in lieu of
interest the Portfolio is required to pay. The proceeds of the short sale are
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. No securities will be sold short,
however, if thereafter the total market value of all securities sold short would
exceed 25% of the value of the Portfolio's assets.
The Portfolio may make short sales "against-the-box", which are transactions in
which the Portfolio sells short a security that it owns in anticipation of a
decline in the market value of that security. The proceeds of the short sale are
held by a broker until the settlement date, at which time the Portfolio delivers
the security to close the short position. The Portfolio receives the net
proceeds from the short sale. It is anticipated that the Portfolio will make
short sales against-the-box only to protect the value of its net assets.
NON-DIVERSIFICATION AND GEOGRAPHIC CONCENTRATION. As a "non-diversified" mutual
fund, the Portfolio may invest its assets in a more limited number of issuers
than may other investment companies. Under the Internal Revenue Code, an
investment company, including a non-diversified investment company, generally
may not invest more than 25% of its total assets in obligations of any one
issuer other than U.S. Government obligations and, with respect to 50% of its
total assets, the Portfolio may not invest more than 5% of its total assets in
the securities of any one issuer (except U.S. Government obligations). Thus, the
Portfolio may invest up to 25% of its total assets in the securities of each of
any two issuers. This practice involves an increased risk of loss to the
Portfolio if the market value of a security should decline or its issuer were
otherwise not to meet its obligations.
The Portfolio may invest more than 25% of its total assets in issuers located in
any one country. To the extent that it does so, the Portfolio is susceptible to
a range of factors that could adversely affect that country, including political
and economic developments and foreign exchange rate fluctuations as discussed
above. 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.
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SECURITIES LOANS, REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS. The Portfolio
may lend portfolio securities amounting to not more than one-quarter of its
total assets to brokers, dealers and financial institutions meeting specified
credit conditions, and may enter into repurchase agreements without limit. Such
activities may create taxable income in excess of the cash they generate. These
transactions must be fully collateralized at all times but involve some risk to
the Portfolio if the other party should default on its obligation and the
Portfolio is delayed or prevented from recovering its assets or realizing on the
collateral. The Portfolio may also purchase securities for future delivery,
which may increase its overall investment exposure and involves a risk of loss
if the value of the securities declines prior to the settlement date.
INVESTMENT IN OTHER INVESTMENT COMPANIES. The Portfolio is permitted to invest
in other investment companies or pooled vehicles, including closed-end funds,
that are advised by SCMI or its affiliates or by unaffiliated parties. The
Portfolio may invest in the shares of other investment companies that invest in
securities in which the Portfolio is permitted to invest, subject to the limits
and conditions required under the Investment Company Act of 1940, as amended
(the "1940 Act"), or any orders, rules or regulations thereunder. When investing
through certain investment companies, the Portfolio may pay a premium above such
investment companies' net asset value per share. 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.
LIQUIDITY. The Portfolio will not invest more than 15% of its net assets in
securities determined by SCMI to be illiquid. Certain securities that are
restricted as to resale may nonetheless be resold by the Portfolio in accordance
with Rule 144A under the 1933 Act. Such securities may be determined by SCMI to
be liquid for purposes of compliance with the limitation on the Portfolio's
investment in illiquid securities. There can, however, be no assurance that the
Portfolio will be able to sell such securities at any time when SCMI deems it
advisable to do so or at prices prevailing for comparable securities that are
more widely held.
ALTERNATIVE INVESTMENTS. At times, SCMI may judge that market conditions make
pursuing the Portfolio's basic investment strategy inconsistent with the best
interests of its interestholders. At such times, SCMI may temporarily use
alternative strategies, primarily designed to reduce fluctuations in the values
of the Portfolio's assets. In implementing these "defensive" strategies, the
Portfolio may invest without limit in U.S. Government obligations and other
high-quality debt instruments and any other investment SCMI considers to be
consistent with such defensive strategies, and may hold any portion of its
assets in cash.
PORTFOLIO TURNOVER
The length of time the Portfolio has held a particular security is not generally
a consideration in investment decisions. The investment policies of the
Portfolio may lead to frequent changes in the Portfolio's investments,
particularly in periods of volatile market movements. A change in the securities
held by the Portfolio is known as "portfolio turnover." Portfolio turnover
generally involves some expense to the Portfolio, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such securities sales may
result in realization of taxable capital gain.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS. The Board of Trustees of the Trust is responsible for
generally overseeing the conduct of the Trust's business. The business and
affairs of the Portfolio are managed under the direction of the Board of
Trustees. Information regarding the Trustees and executive officers of the Trust
may be found in Part B.
INVESTMENT ADVISER. SCMI, the investment adviser to the Portfolio, is a wholly
owned U.S. subsidiary of Schroder U.S. Holdings Inc., which engages through its
subsidiary firms in the investment banking, asset management, and securities
businesses. Affiliates of Schroder U.S. Holdings Inc. (or their predecessors)
have been investment managers since 1927. SCMI and its United Kingdom affiliate,
Schroder Capital Management International, Ltd., served as investment managers
for approximately $28 billion in the aggregate as of September 30, 1997.
Schroder U.S. Holdings Inc. is an indirect, wholly owned U.S. subsidiary of
Schroders plc, a publicly owned holding
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company organized under the laws of England. Schroders plc and its affiliates
engage in international merchant banking and investment management businesses,
and as of September 30, 1997, had under management assets of over $175 billion.
Schroder Fund Advisors Inc. ("Schroder Advisors") is a wholly owned subsidiary
of SCMI.
As investment adviser to the Portfolio, SCMI is entitled to monthly advisory
fees at the annual rate of 0.50% of the Portfolio's average daily net assets.
SCMI currently has agreed, however, to waive all of the advisory fees payable by
the Portfolio under the Investment Advisory Agreement between it and the Trust.
Such fee limitation arrangement shall remain in effect until its elimination is
approved by the Board of Trustees of the Trust.
PORTFOLIO MANAGERS. The Portfolio is managed by the International Fixed Income
Committee of SCMI. The individuals responsible for the day-to-day implementation
of the Committee's investment decisions are Michael Perelstein and Mark Astley.
Mr. Perelstein and Mr. Astley have managed the Portfolio since inception. Mr.
Perelstein was appointed a Senior Vice President and director of SCMI in January
1997 and is also a Vice President of the Trust, of Schroder Capital Funds
(Delaware), and of Schroder Capital Funds. Prior thereto, Mr. Perelstein was a
Managing Director at MacKay-Shields Financial Corp. Mr. Perelstein has more than
twelve years of international and global investment experience. Mr. Astley, a
First Vice President of SCMI and a Vice President of the Trust and of Schroder
Capital Funds (Delaware), has been with the firm for 10 years. In addition to
serving as a global fixed-income portfolio manager, Mr. Astley serves as a
currency specialist for SCMI's International Fixed Income Committee.
PORTFOLIO TRANSACTIONS. SCMI places all orders for purchases and sales of the
Portfolio's securities. In selecting broker-dealers, SCMI may consider research
and brokerage services furnished to it and its affiliates. Schroder & Co. Inc.
and Schroder Securities Limited, affiliates of SCMI, may receive brokerage
commissions from the Portfolio in accordance with procedures adopted by the
Trustees under the 1940 Act which require periodic review of these transactions.
Subject to seeking the most favorable price and execution available, SCMI may
consider sales of shares of the Portfolio as a factor in the selection of
broker-dealers.
ADMINISTRATIVE SERVICES. The Trust, on behalf of the Portfolio, has entered into
an administration agreement with Schroder Advisors pursuant to which Schroder
Advisors provides certain management and administrative services to the
Portfolio. For these services Schroder Advisors is entitled to receive an
administration fee at the annual rate of 0.10% of the Portfolio's average daily
net assets. The Trust also has entered into a subadministration agreement with
Forum Administrative Services, LLC, Two Portland Square, Portland, Maine 04101
("FAdS"), pursuant to which FAdS provides certain management and administrative
services necessary for the Portfolio's operations. For these subadministration
services, FAdS is entitled to receive a subadminstration fee at an annual rate
of 0.075% of the Portfolio's average daily net assets; the minimum annual
subadministration fee is $25,000 per annum. From time to time, each of Schroder
Advisors or FAdS may agree to waive all or a portion of its fees.
RECORDKEEPER AND PORTFOLIO ACCOUNTANT. Forum Financial Corp. ("FFC"), Two
Portland Square, Portland, Maine 04101, is the Portfolio's recordkeeper
(transfer agent) and portfolio accountant. FFC is an affiliate of FAdS.
For its services as the Portfolio's interestholder recordkeeper, FFC is entitled
to compensation in the amount of $12,000 per year, plus certain other fees and
expenses. For its accounting services to the Portfolio, FFC is entitled to
compensation in the amount of $60,000 per year plus certain other fees and
expenses. 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
portfolio accounting fees, as described above; compensation of certain of the
Trust's Trustees; costs of membership trade associations; fees 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.
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CUSTODIAN. The Chase Manhattan Bank ("Chase"), Chase MetroTech Center, Brooklyn,
New York 11245 acts as custodian of the Portfolio's assets and, for foreign
securities, through its Global Securities Services division located at 125
London Wall, London EC2Y 5AJ, United Kingdom. Chase employs foreign
subcustodians to maintain the Portfolio's foreign assets outside the U.S.
CAPITAL STOCK AND OTHER SECURITIES
The Trust was organized on December 27, 1996 as a business trust under the laws
of the State of Delaware under a Trust Instrument dated December 26, 1996. Under
the Trust Instrument, the Trustees are authorized to issue Interests in separate
series of the Trust. The Trust currently has one series (being the Portfolio),
and the Trust reserves the right to create additional series.
Each investor in the Portfolio is entitled to participate 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
interestholders, but the Trust will hold special meetings of interestholders
when in the Trustees' judgment it is necessary or desirable to submit matters
for an interestholder vote. Generally, Interests are voted in the aggregate
without reference to a particular series, unless the Trustees determine that the
matter affects only one series or series voting is required, in which case
Interests are voted separately by the Portfolio. Upon liquidation of the
Portfolio, interestholders will be entitled to share pro rata in the Portfolio's
net assets available for distribution to interestholders.
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 gains and losses of the Portfolio are
deemed to "pass through" to its investors, regardless of whether such interest,
dividends or gains are distributed by the Portfolio or losses are realized by
the Portfolio.
Under the Portfolio's operational method, it is not subject to any income tax.
However, each investor in the Portfolio will be taxed on its proportionate share
(as determined in accordance with the Trust's Trust Instrument and the Internal
Revenue 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.
As of March 31, 1998, each of the following held in excess of 25% of the
Portfolio's Interests and may therefore be considered a "control person" of the
Portfolio: (1) Thomas Carter Lupton, Trustee, c/o SCMI Ltd., 33 Gutter Lane,
London EC2V 8AS, United Kingdom, 38.15%; and (2) Sealaska Corporation -
Permanent Fund, One Sealaska Plaza, Juneau, Alaska 99801, 46.42%.
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.
Net asset value is calculated as of the close of the New York Stock Exchange
(the "Exchange") (normally, 4:00 p.m. Eastern time), Monday through Friday, on
each day that the 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 Day and Christmas Day) ("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. Generally,
securities that are listed on recognized stock exchanges are valued at the last
reported sale price, on the day when the securities are valued (the "Valuation
Day"), on the primary
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exchange on which the securities are principally traded. Listed securities
traded on recognized stock exchanges for which there were no sales on the
Valuation Day are valued at the last sale price on the preceding trading day or
at closing mid-market prices. Securities traded in over-the-counter markets 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 Trust's Board of
Trustees.
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 SCMI using procedures
approved by the Trust's Board of Trustees. All assets and liabilities of the
Portfolio denominated in foreign currencies are converted to U.S. dollars at the
mid price of such currencies against U.S. dollars last quoted by a major bank
prior to the time when net asset value of the Portfolio is calculated.
Registered investment companies investing in the Portfolio 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 in 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.: 910-2-783637
Ref.: Schroder International Bond Portfolio
Account of: [interestholder name]
Account Number: [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 in good order
prior to the close of the Exchange (normally 4:00 p.m. Eastern time) on each
Business Day are processed at the net asset value next determined that day. Wire
orders received after the closing of the Exchange are processed at the net asset
value next determined. 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 FAdS and FFC, is the placement
agent for the Trust. The placement agent receives no compensation for its
services.
REDEMPTION OR REPURCHASE
An investor may redeem all or any portion of its investment in the Portfolio at
the net asset value next determined after the investor furnishes a redemption
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 Exchange is closed (or
when trading on the
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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 in proper form prior to the closing of the
Exchange are processed at the net asset value next determined on that day.
Redemption requests that are received after the closing of the Exchange are
processed at the net asset value next determined. 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 International Bond Portfolio
P.O. Box 446
Portland, Maine 04112
Telephone redemption requests may be made by telephoning the transfer agent at
1-800-344-8332 or 1-207-879-8903. 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 Securities and Exchange
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
None.
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SCHRODER CAPITAL FUNDS II
-------------
SCHRODER INTERNATIONAL BOND PORTFOLIO
PART B
(PRIVATE PLACEMENT MEMORANDUM)
APRIL 30, 1998
COVER PAGE
Not applicable.
TABLE OF CONTENTS
General Information and History..............................................2
Investment Objective and Policies............................................3
Investment Restrictions......................................................16
Management of the Trust......................................................17
Control Persons and Principal Holders of Securities..........................20
Investment Advisory and Other Services.......................................20
Brokerage Allocation and Other Practices.....................................23
Capital Stock and Other Securities...........................................25
Purchase, Redemption and Pricing of Securities...............................26
Tax Status...................................................................27
Placement Agent..............................................................29
Calculations of Performance Data.............................................29
Financial Statements.........................................................29
Appendix A -Description of Securities Ratings................................30
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.
THE TRUST'S SECURITIES DESCRIBED IN THIS PRIVATE PLACEMENT MEMORANDUM ARE NOT
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE. INTERESTS MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER: (1) THE TERMS OF THE TRUST'S TRUST INSTRUMENT,
AND (2) THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE OR FOREIGN
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
<PAGE>
GENERAL INFORMATION AND HISTORY
See "General Description of Registrant", "Management of the Trust" and "Capital
Stock and Other Securities" in Part A of this Private Placement Memorandum. As
used herein the following terms have the meanings ascribed:
Board The term "Board" means of the Board of Trustees of the Trust.
CFTC The term "CFTC" means the United States Commodity
Futures Trading Commission.
Code The term "Code" means the United States Internal
Revenue Code of 1986, as amended.
FFC The term "FFC" means Forum Financial Corp., the
Portfolio's interestholder recordkeeper and portfolio
accountant.
Forum The term "Forum" means Forum Administrative Services,
LLC, the Portfolio's subadministrator.
Portfolio The term "Portfolio" means Schroder International
Bond Portfolio.
Schroder Advisors The term "Schroder Advisors" means Schroder
Fund Advisors Inc., the Portfolio's administrator.
SCMI The term "SCMI" means Schroder Capital Management
International Inc., the Portfolio's investment
adviser.
SEC The term "SEC" means the United States Securities and
Exchange Commission.
Trust The term "Trust" means Schroder Capital Funds II.
U.S. Government The term "U.S. Government Securities' means
Securities securities issued or guaranteed by the United States
Government or by its agencies or instrumentalities.
1933 Act The term "1933 Act" means the Securities Act of 1933,
as amended.
1940 Act The term "1940 Act' means the United States
Investment Company Act of 1940, as amended.
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INVESTMENT OBJECTIVE AND POLICIES
Part A contains information about the investment objective, policies and
restrictions of the Portfolio. The Portfolio is a series of the Trust. The
following discussion supplements the disclosure in Part A concerning the
Portfolio's investments, investment techniques and strategies and the associated
risks. This Part B should be read only in conjunction with Part A. Defined terms
used in this Part B have the same meaning as in Part A.
Except as otherwise noted, the policies described in Part A and in this Part B
are not "fundamental", and the Board may change the non-fundamental policies of
the Portfolio without an affirmative vote of the Portfolio's interestholders.
The following descriptions of certain investment policies and techniques are
applicable to the Portfolio.
OPTIONS
The Portfolio may purchase and sell covered put and call options on its
portfolio securities to enhance investment performance and to protect against
changes in market prices.
COVERED CALL OPTIONS. The Portfolio may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Portfolio.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated as
a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the right
to acquire such securities through immediate conversion of securities.
In return for the premium received when it writes a covered call option, the
Portfolio gives up some or all of the opportunity to profit from an increase in
the market price of the securities covering the call option during the life of
the option. The Portfolio retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Portfolio realizes a
gain equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Portfolio realizes a gain
or loss equal to the difference between the Portfolio's cost for the underlying
security and the proceeds of sale (exercise price minus commissions) plus the
amount of the premium.
The Portfolio may terminate a call option that it has written before it expires
by entering into a closing purchase transaction. The Portfolio may enter into
closing purchase transactions in order to free itself to sell the underlying
security or to write another call on the security, realize a profit on a
previously written call option, or protect a security from being called in an
unexpected market rise. Any profits from a closing purchase transaction may be
offset by a decline in the value of the underlying security. Conversely, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss resulting from a
closing purchase transaction is likely to be offset in whole or in part by
unrealized appreciation of the underlying security owned by the Portfolio.
COVERED PUT OPTIONS. The Portfolio may write covered put options in order to
enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Portfolio plans to purchase. A put option gives the holder the right to sell,
and obligates the writer to buy, a security at the exercise price at any time
before the expiration date. A put option is "covered" if the writer segregates
cash and high-grade short-term debt obligations or other permissible collateral
equal to the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from terminating
such options in closing purchase transactions, the Portfolio also receives
interest on the cash and debt securities maintained to cover the exercise price
of the option. By writing a put option, the Portfolio assumes the risk that it
may be required to purchase the
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underlying security for an exercise price higher than its then current market
value, resulting in a potential capital loss unless the security later
appreciates in value.
The Portfolio may terminate a put option that it has written before it expires
by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. The Portfolio may also purchase put options to
protect portfolio holdings against a decline in market value. This protection
lasts for the life of the put option because the Portfolio, as a holder of the
option, may sell the underlying security at the exercise price regardless of any
decline in its market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs that the Portfolio
must pay. These costs will reduce any profit the Portfolio might have realized
had it sold the underlying security instead of buying the put option.
The Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security.
The Portfolio may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
The Portfolio may also purchase put and call options to enhance its current
return.
OPTIONS ON FOREIGN SECURITIES. The Portfolio may purchase and sell options on
foreign securities if in SCMI's opinion the investment characteristics of such
options, including the risks of investing in such options, are consistent with
the Portfolio's investment objectives. It is expected that risks related to such
options will not differ materially from risks related to options on U.S.
securities. However, position limits and other rules of foreign exchanges may
differ from those in the U.S. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets in
the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain
risks, including the risks that SCMI will not forecast interest rate or market
movements correctly, that the Portfolio may be unable at times to close out such
positions, or that hedging transactions may not accomplish their purpose because
of imperfect market correlations. The successful use of these strategies depends
on the ability of SCMI to forecast market and interest rate movements correctly.
An exchange-listed option may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. If no secondary market were to exist, it would be
impossible to enter into a closing transaction to close out an option position.
As a result, the Portfolio may be forced to continue to hold, or to purchase at
a fixed price, a security on which it has sold an option at a time when SCMI
believes it is inadvisable to do so.
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Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict the Portfolio's
use of options. The exchanges have established limitations on the maximum number
of calls and puts of each class that may be held or written by an investor or
group of investors acting in concert. It is possible that the Portfolio and
other clients of SCMI may be considered such a group. These position limits may
restrict the Portfolio's ability to purchase or sell options on particular
securities.
Options that are not traded on national securities exchanges may be closed out
only with the other party to the option transaction. For that reason, it may be
more difficult to close out unlisted options than listed options. Furthermore,
unlisted options are not subject to the protection afforded purchasers of listed
options by The Options Clearing Corporation.
FUTURES CONTRACTS
In order to hedge against the effects of adverse market changes, the Portfolio
may buy and sell futures contracts on debt securities in which it may invest and
on indexes of debt securities. In addition, to the extent that it may invest in
equity securities, the Portfolio may purchase and sell stock index futures to
hedge against changes in stock market prices. The Portfolio may also, to the
extent permitted by applicable law, buy and sell futures contracts and options
on futures contracts to increase the Portfolio's current return. All such
futures and related options will, as may be required by applicable law, be
traded on exchanges that are licensed and regulated by the CFTC.
FUTURES ON DEBT SECURITIES AND RELATED OPTIONS. A futures contract on a debt
security is a binding contractual commitment which, if held to maturity, will
result in an obligation to make or accept delivery, during a particular month,
of securities having a standardized face value and rate of return. By purchasing
futures on debt securities -- assuming a "long" position -- the Portfolio will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities -- assuming a
"short" position -- it will legally obligate itself to make the future delivery
of the security against payment of the agreed price.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions that may result in a
profit or a loss. While futures positions taken by the Portfolio will usually be
liquidated in this manner, the Portfolio may instead make or take delivery of
the underlying securities whenever it appears economically advantageous to the
Portfolio to do so. A clearing corporation associated with the exchange on which
futures are traded assumes responsibility for such closing transactions and
guarantees that the Portfolio's sale and purchase obligations under closed-out
positions will be performed at the termination of the contract.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. The Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in interest
rates that would adversely affect the value of the Portfolio's portfolio
securities. When hedging of this character is successful, any depreciation in
the value of portfolio securities may be offset substantially by appreciation in
the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
expects to purchase particular securities when it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities may be offset, at least to some extent, by the rise in
the value of the futures position taken in anticipation of the subsequent
securities purchase.
Successful use by the Portfolio of futures contracts on debt securities is
subject to SCMI's ability to predict correctly movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Portfolio has hedged against the possibility of an increase in
interest rates which would adversely affect the
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market prices of debt securities held by it and the prices of such securities
increase instead, the Portfolio will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily maintenance margin requirements. The Portfolio may have to sell securities
at a time when it may be disadvantageous to do so.
The Portfolio may purchase and write put and call options on certain debt
futures contracts, as they become available. Such options are similar to options
on securities except that options on futures contracts give 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 period of
the option. As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an option of the same series.
There is no guarantee that such closing transactions can be effected. The
Portfolio will be required to deposit initial margin and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
brokers' requirements; and, in addition, net option premiums received will be
included as initial margin deposits. See "Margin Payments" below. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Portfolio because the
maximum amount at risk is the premium paid for the options plus transactions
costs. However, there may be circumstances when the purchase of call or put
options on a futures contract would result in a loss to the Portfolio when the
purchase or sale of the futures contracts would not, such as when there is no
movement in the prices of debt securities. The writing of a put or call option
on a futures contract involves risks similar to those risks relating to the
purchase or sale of futures contracts.
INDEX FUTURES CONTRACTS AND OPTIONS. The Portfolio may invest in debt index
futures contracts and stock index futures contracts, and in related options. A
debt index futures contract is a contract to buy or sell units of a specified
debt index at a specified future date at a price agreed upon when the contract
is made. A unit is the current value of the index. Debt index futures in which
the Portfolio is presently expected to invest are not now available, although
such futures contracts are expected to become available in the future. A stock
index futures contract is a contract to buy or sell units of a stock index at a
specified future date at a price agreed upon when the contract is made. A unit
is the current value of the stock index.
The following example illustrates generally the manner in which index futures
contracts operate. The Standard & Poor's 100 Stock Index (the "Index") is
composed of 100 selected common stocks, most of which are listed on the New York
Stock Exchange. The Index assigns relative weightings to the common stocks
included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the Index, contracts are to buy or
sell 100 units. Thus, if the value of the Index were $180, one contract would be
worth $18,000 (100 units x $180). The stock index futures contract specifies
that no delivery of the actual stocks making up the Index will take place.
Instead, settlement in cash must occur upon the termination of the contract,
with the settlement being the difference between the contract price and the
actual level of the stock index at the expiration of the contract. For example,
if the Portfolio enters into a futures contract to buy 100 units of the Index at
a specified future date at a contract price of $180 and the Index is at $184 on
that future date, the Portfolio will gain $400 (100 units x gain of $4). If the
Portfolio enters into a futures contract to sell 100 units of the stock index at
a specified future date at a contract price of $180 and the Index is at $182 on
that future date, the Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to any
securities indexes. Positions in index futures may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
In order to hedge the Portfolio's investments successfully using futures
contracts and related options, the Portfolio must invest in futures contracts
with respect to indexes or sub-indexes the movements of which will, in its
judgment, have a significant correlation with movements in the prices of the
Portfolio's securities.
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Options on index futures contracts are similar to options on securities except
that options on index futures contracts give the purchaser the right, in return
for the premium paid, to assume a position in an index 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 period of the option. Upon
exercise of the option, the holder would assume the underlying futures position
and would receive a variation margin payment of cash or securities approximating
the increase in the value of the holder's option position. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash based on the difference between the
exercise price of the option and the closing level of the index on which the
futures contract is based on the expiration date. Purchasers of options who fail
to exercise their options prior to the exercise date suffer a loss of the
premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, the Portfolio may purchase and sell call and put options on
the underlying indexes themselves to the extent that such options are traded on
national securities exchanges. Index options are similar to options on
individual securities in that the purchaser of an index option acquires the
right to buy (in the case of a call) or sell (in the case of a put), and the
writer undertakes the obligation to sell or buy (as the case may be), units of
an index at a stated exercise price during the term of the option. Instead of
giving the right to take or make actual delivery of securities, the holder of an
index option has the right to receive a cash "exercise settlement amount". This
amount is equal to the amount by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
a fixed "index multiplier".
The Portfolio may purchase or sell options on stock indices in order to close
out its outstanding positions in options on stock indices which it has
purchased. The Portfolio may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on an index involves less potential risk to the Portfolio because
the maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar to
those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When the Portfolio purchases or sells a futures contract, it is
required to deposit with its custodian an amount of cash, U.S. Treasury bills,
or other permissible collateral equal to a small percentage of the amount of the
futures contract. This amount is known as "initial margin". The nature of
initial margin is different from that of margin in security transactions in that
it does not involve borrowing money to finance transactions. Rather, initial
margin is similar to a performance bond or good faith deposit that is returned
to the Portfolio upon termination of the contract, assuming the Portfolio
satisfies its contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a process
known as "marking to market". These payments are called "variation margin" and
are made as the value of the underlying futures contract fluctuates. For
example, when the Portfolio sells a futures contract and the price of the
underlying debt security rises above the delivery price, the Portfolio's
position declines in value. The Portfolio then pays the broker a variation
margin payment equal to the difference between the delivery price of the futures
contract and the market price of the securities underlying the futures contract.
Conversely, if the price of the underlying security falls below the delivery
price of the contract, the Portfolio's futures position increases in value. The
broker then must make a variation margin payment equal to the difference between
the delivery price of the futures contract and the market price of the
securities underlying the futures contract.
When the Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
Although the Portfolio intends to purchase or sell futures only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a
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liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. If there is not a liquid
secondary market at a particular time, it may not be possible to close a futures
position at such time and, in the event of adverse price movements, the
Portfolio would continue to be required to make daily cash payments of variation
margin. However, in the event financial futures are used to hedge portfolio
securities, such securities will not generally be sold until the financial
futures can be terminated. In such circumstances, an increase in the price of
the portfolio securities, if any, may partially or completely offset losses on
the financial futures.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
such a market will develop. Although the Portfolio generally will purchase only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. In the event no such market exists
for particular options, it might not be possible to effect closing transactions
in such options with the result that the Portfolio would have to exercise the
options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by the
Portfolio of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of the Portfolio's securities which are the
subject of a hedge. SCMI will, however, attempt to reduce this risk by
purchasing and selling, to the extent possible, futures contracts and related
options on securities and indexes the movements of which will, in its judgment,
correlate closely with movements in the prices of the underlying securities or
index and the Portfolio's portfolio securities sought to be hedged.
Successful use of futures contracts and options by the Portfolio for hedging
purposes is also subject to SCMI's ability to predict correctly movements in the
direction of the market. It is possible that, where the Portfolio has purchased
puts on futures contracts to hedge its portfolio against a decline in the
market, the securities or index on which the puts are purchased may increase in
value and the value of securities held in the portfolio may decline. If this
occurred, the Portfolio would lose money on the puts and also experience a
decline in value in its portfolio securities. In addition, the prices of
futures, for a number of reasons, may not correlate perfectly with movements in
the underlying securities or index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit requirements.
Such requirements may cause investors to close futures contracts through
offsetting transactions which could distort the normal relationship between the
underlying security or index and futures markets. Second, the margin
requirements in the futures markets are less onerous than margin requirements in
the securities markets in general, and as a result the futures markets may
attract more speculators than the securities markets do. Increased participation
by speculators in the futures markets may also cause temporary price
distortions. Due to the possibility of price distortion, even a correct forecast
of general market trends by SCMI may still not result in a successful hedging
transaction over a very short time period.
OTHER RISKS. The Portfolio will incur brokerage fees in connection with its
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while the Portfolio
may benefit from the use of futures and related options, unanticipated changes
in interest rates or stock price movements may result in a poorer overall
performance for the Portfolio than if it had not entered into any futures
contracts or options transactions. Moreover, in the event of an imperfect
correlation between the futures position and the portfolio position that is
intended to be protected, the desired protection may not be obtained and the
Portfolio may be exposed to risk of loss.
FORWARD COMMITMENTS
The Portfolio may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Portfolio holds, and maintains until the settlement date in a segregated
account, cash or high-grade debt obligations in an amount sufficient to meet the
purchase price, or if the Portfolio enters into offsetting contracts for the
forward sale of other securities it owns. Forward commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines
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prior to the settlement date, which risk is in addition to the risk of decline
in the value of the Portfolio's other assets. Where such purchases are made
through dealers, the Portfolio relies on the dealer to consummate the sale. The
dealer's failure to do so may result in the loss to the Portfolio of an
advantageous yield or price.
Although the Portfolio will generally enter into forward commitments with the
intention of acquiring securities for its portfolio or for delivery pursuant to
options contracts it has entered into, the Portfolio may dispose of a commitment
prior to settlement if SCMI deems it appropriate to do so. The Portfolio may
realize short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements. A repurchase agreement is a
contract under which the Portfolio acquires a security for a relatively short
period (usually not more than 7 days) subject to the obligation of the seller to
repurchase and the Portfolio to resell such security at a fixed time and price
(representing the Portfolio's cost plus interest). It is the Trust's present
intention to enter into repurchase agreements only with member banks of the
Federal Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of the
Trust and only with respect to obligations of the U.S. Government or its
agencies or instrumentalities or other high quality short term debt obligations.
Repurchase agreements may also be viewed as loans made by the Portfolio which
are collateralized by the securities subject to repurchase. SCMI will monitor
such transactions to ensure that the value of the underlying securities will be
at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Portfolio could
realize a loss on the sale of the underlying security to the extent that the
proceeds of sale including accrued interest are less than the resale price
provided in the agreement including interest. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Portfolio may incur
delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the Portfolio is treated as an unsecured creditor and
required to return the underlying collateral to the seller's estate.
WHEN-ISSUED SECURITIES
The Portfolio may from time to time purchase securities on a "when-issued"
basis. Debt securities are often issued on this basis. The price of such
securities, which may be expressed in yield terms, is fixed at the time a
commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the Portfolio and no interest accrues to the
Portfolio. To the extent that assets of the Portfolio are held in cash pending
the settlement of a purchase of securities, that Portfolio would earn no income.
While the Portfolio may sell its right to acquire when-issued securities prior
to the settlement date, the Portfolio intends actually to acquire such
securities unless a sale prior to settlement appears desirable for investment
reasons. At the time the Portfolio makes the commitment to purchase a security
on a when-issued basis, it will record the transaction and reflect the amount
due and the value of the security in determining the Portfolio's net asset
value. The market value of the when-issued securities may be more or less than
the purchase price payable at the settlement date. The Portfolio will establish
a segregated account in which it will maintain cash and U.S. Government
Securities or other high-grade debt obligations at least equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government Securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Portfolio may at any
time call the loan and regain the securities loaned; (3) the Portfolio will
receive any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of the Portfolio. In addition, it is anticipated
that the Portfolio may share with the borrower some of the income received on
the collateral for the loan or that it will be paid a premium for the loan.
Before the Portfolio enters into a loan, SCMI considers all relevant facts and
circumstances including the creditworthiness of the borrower. The risks in
lending
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portfolio securities, as with other extensions of credit, consist of possible
delay in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Although voting rights or rights to
consent with respect to the loaned securities pass to the borrower, the
Portfolio retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Portfolio if
the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Portfolio will not lend portfolio
securities to borrowers affiliated with the Portfolio.
FOREIGN SECURITIES
The Portfolio may invest in foreign securities and in certificates of deposit
issued by United States branches of foreign banks and foreign branches of United
States banks.
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and possible
consequent illiquidity, greater volatility in price, the possible imposition of
withholding or confiscatory taxes, the possible adoption of foreign governmental
restrictions affecting the payment of principal and interest, expropriation of
assets, nationalization, or other adverse political or economic developments.
Foreign companies may not be subject to auditing and financial reporting
standards and requirements comparable to those which apply to U.S. companies.
Foreign brokerage commissions and other fees are generally higher than in the
United States. It may be more difficult to obtain and enforce a judgment against
a foreign issuer.
In addition, to the extent that the Portfolio's foreign investments are not U.
S. dollar-denominated, the Portfolio may be affected favorably or unfavorably by
changes in currency exchange rates or exchange control regulations and may incur
costs in connection with conversion between currencies.
In determining whether to invest in securities of foreign issuers, SCMI will
consider the likely impact of foreign taxes on the net yield available to the
Portfolio and its interestholders. Income received by the Portfolio from sources
within foreign countries may be reduced by withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the Portfolio's
assets to be invested in various countries is not known, and tax laws and their
interpretations may change from time to time and may change without advance
notice. Any such taxes paid by the Portfolio will reduce its net income
available for distribution to interestholders.
FOREIGN CURRENCY TRANSACTIONS
The Portfolio may engage in currency exchange transactions to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Portfolio may engage in both "transaction hedging"
and "position hedging."
When it engages in transaction hedging, the Portfolio enters into foreign
currency transactions with respect to specific receivables or payables of the
Portfolio generally arising in connection with the purchase or sale of its
portfolio securities. The Portfolio will engage in transaction hedging when it
desires to "lock in" the U.S. dollar price of a security it has agreed to
purchase or sell, or the U.S. dollar equivalent of a dividend or interest
payment in a foreign currency. By transaction hedging the Portfolio will attempt
to protect against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received.
The Portfolio may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with transaction hedging. The
Portfolio may also enter into contracts to purchase or sell foreign currencies
at a future date ("forward contracts") and purchase and sell foreign currency
futures contracts.
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For transaction hedging purposes the Portfolio may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the
Portfolio the right to assume a short position in the futures contract until
expiration of the option. A put option on currency gives the Portfolio the right
to sell a currency at an exercise price until the expiration of the option. A
call option on a futures contract gives the Portfolio the right to assume a long
position in the futures contract until the expiration of the option. A call
option on currency gives the Portfolio the right to purchase a currency at the
exercise price until the expiration of the option. The Portfolio will engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in SCMI's opinion, the pricing mechanism and liquidity
are satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
When it engages in position hedging, the Portfolio enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which securities held by the Portfolio are denominated or are
quoted in their principal trading markets or an increase in the value of
currency for securities that the Portfolio expects to purchase. In connection
with position hedging, the Portfolio may purchase put or call options on foreign
currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. The Portfolio may also
purchase or sell foreign currency on a spot basis.
The precise matching of the amounts of foreign currency exchange transactions
and the value of the portfolio securities involved will not generally be
possible since the future value of such securities in foreign currencies will
change as a consequence of market movements in the values of those securities
between the dates the currency exchange transactions are entered into and the
dates they mature.
It is impossible to forecast with precision the market value of the Portfolio's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security or securities being hedged is less
than the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security or securities and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security or
securities of the Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against fluctuations in
currency exchange rates, the Portfolio may write covered call options on those
currencies.
Transaction and position hedging do not eliminate fluctuations in the underlying
prices of the securities which the Portfolio owns or intends to purchase or
sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
The Portfolio may also seek to increase its current return by engaging in
foreign currency exchange transactions.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency exchange
contract involves 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
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The 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. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
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Forward foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a predetermined date in a given month. Forward
contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Portfolio may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Portfolio will normally
purchase or sell foreign currency futures contracts and related options only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or option or at any particular
time. In such event, it may not be possible to close a futures or related option
position and, in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on its
futures positions.
FOREIGN CURRENCY OPTIONS
Options on foreign currencies operate similarly to options on securities, and
are traded primarily in the over-the-counter market, although options on foreign
currencies have recently been listed on several exchanges. Such options will be
purchased or written only when SCMI believes that a liquid secondary market
exists for such options. There can be no assurance that a liquid secondary
market will exist for a particular option at any specific time. Options on
foreign currencies are affected by all of those factors which influence exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. 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
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(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 cannot be reflected in the U.S. options markets.
FOREIGN CURRENCY CONVERSION
Although foreign exchange dealers do not charge a fee for currency conversion,
they do realize a profit based on the difference (the "spread") between prices
at which they buy and sell various currencies. Thus, a dealer may offer to sell
a foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
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ZERO-COUPON SECURITIES
Zero-coupon securities in which the Portfolio may invest are debt obligations
which are generally issued at a discount and payable in full at maturity, and
which do not provide for current payments of interest prior to maturity.
Zero-coupon securities usually trade at a deep discount from their face or par
value and are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest. As a result, the net asset value of shares of the
Portfolio may fluctuate over a greater range than shares of other mutual funds
investing in securities making current distributions of interest and having
similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). TIGRS and CATS are not considered U.S. Government
Securities. The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(I.E., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of U.S. Treasury
zero-coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately. The principal or corpus is
sold at a deep discount because the buyer receives only the right to receive a
future fixed payment on the security and does not receive any rights to periodic
cash interest payments. Once stripped or separated, the corpus and coupons may
be sold separately. Typically, the coupons are sold separately or grouped with
other coupons with like maturity dates and sold in such bundled form. Purchasers
of stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero-coupon securities issued directly by the
obligor.
SHORT SALES
In a short sale, the Portfolio sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The Portfolio also
may engage in short sales if, at the time of the short sale, it owns or has the
right to obtain, at no additional cost, an equal amount of the security being
sold short. This investment technique is known as a short sale
"against-the-box." In such a short sale, a seller does not immediately deliver
the securities sold and is said to have a short position in those securities
until delivery occurs. If the Portfolio engages in a short sale, the collateral
for the short position is maintained by the Portfolio's custodian or a qualified
sub-custodian. While the short sale is open, the Portfolio maintains in a
segregated account an amount of securities equal in kind and amount to the
securities sold short or securities convertible into or exchangeable for such
equivalent securities. These securities constitute the Portfolio's long
position. The Portfolio does not engage in short sales against-the-box for
speculative purposes but may, however, make a short sale as a hedge, when SCMI
believes that the price of a security may decline, causing a decline in the
value of a security owned by the Portfolio (or a security convertible or
exchangeable for such security). There are certain additional transaction costs
associated with short sales against-the-box, but SCMI endeavors to offset these
costs with the income from the investment of the cash proceeds of short sales.
Under the Taxpayer Relief Act of 1997, activities by the Portfolio which lock-in
gain on an appreciated financial instrument generally will be treated as a
"constructive sale" of such instrument which will trigger gain (but
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not loss) for federal income tax purposes. Such activities may create taxable
income in excess of the cash they generate. For more information regarding the
taxation of such activities, see "Tax Status."
ARBITRAGE
The Portfolio may sell a security in one market and simultaneously purchase the
same security in another market in order to take advantage of differences in the
price of the security in the different markets. The Portfolio does not actively
engage in arbitrage. Such transactions may be entered into only with respect to
debt securities and will occur only in a dealer's market where the buying and
selling dealers involved confirm their prices to the Portfolio at the time of
the transaction, thus eliminating any risk to the assets of the Portfolio.
SWAP AGREEMENTS
The Portfolio may enter into interest-rate, index and currency-exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Portfolio than if the Portfolio had invested directly in
an instrument that yielded that desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount" (I.E., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, in a
particular foreign currency or in a "basket" of securities representing a
particular index). Commonly used swap agreements include interest-rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
interest-rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest-rate collars, under which a party
sells a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations that the parties to a swap agreement have agreed to
exchange. Most swap agreements entered into by the Portfolio would calculate the
obligations of the parties to the agreement on a "net" basis. Consequently, the
Portfolio's obligations (or rights) under a swap agreement are generally equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). The Portfolio's obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Portfolio) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by maintaining a
segregated account comprised of "Segregable Assets" to avoid any potential
leveraging of the Portfolio's investment portfolio. The Portfolio will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Portfolio's assets.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act (the "CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA. To qualify for this exemption, a
swap agreement must be entered into by "eligible participants," which includes
the following, provided the participants' total assets exceed established
levels: a bank or trust company, savings association or credit union, insurance
company, investment company subject to regulation under the 1940 Act, commodity
pool, corporation, partnership, proprietorship, organization, trust or other
entity, employee benefit plan, governmental entity, broker-dealer, futures
commission merchant, natural person, or regulated foreign person. To be
eligible, natural persons and most other entities must have total assets
exceeding $10 million; commodity pools and employee benefit plans must have
assets exceeding $5 million. In addition, an eligible swap transaction must meet
three conditions. First, the swap agreement may not be part of a fungible class
of agreements that are standardized as to their material economic terms. Second,
the creditworthiness of parties with actual or potential obligations under the
swap agreement must be a material consideration in entering into or determining
the terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
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This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that: (1) have
individually tailored terms; (2) lack exchange style offset and the use of a
clearing organization or margin system; (3) are undertaken in conjunction with a
line of business; and (4) are not marketed to the public.
DEPOSITARY RECEIPTS
The Portfolio may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), and other similar instruments providing for
indirect investment in securities of foreign issuers. Due to the absence of
established securities markets in certain foreign countries and restrictions in
certain countries on direct investment by foreign entities, the Portfolio may
invest in certain issuers through the purchase of sponsored and unsponsored ADRs
or other similar securities, such as American Depositary Shares, Global
Depositary Shares or International Depositary 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.
LOAN PARTICIPATION INTERESTS
The Portfolio's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from an
agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, the Portfolio would assume all of the rights of
the lender in a corporate loan, including the right to receive payments of
principal and interest and other amounts directly from the borrower and to
enforce its rights as a lender directly against the borrower. As an alternative,
the Portfolio may purchase an assignment of all or a portion of a lender's
interest in a corporate loan, in which case, the Portfolio may be required
generally to rely on the assigning lender to demand payment and enforce its
rights against the borrower, but would otherwise be entitled to all of such
lender's rights in the corporate loan. The Portfolio also may purchase a
Participation Interest in a portion of the rights of a lender in a corporate
loan. In such a case, the Portfolio will be entitled to receive payments of
principal, interest and fees, if any, but generally will not be entitled to
enforce its rights directly against the agent bank or the borrower; rather the
Portfolio must rely on the lending institution for that purpose. The Portfolio
will not act as an agent bank, a guarantor or sole negotiator or a structure
with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation Interests, the
agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. The Portfolio
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement the Portfolio has direct recourse against the borrower
(which is unlikely), the Portfolio will rely on the agent bank to use
appropriate creditor remedies against the borrower. The agent bank also is
responsible for monitoring compliance with covenants contained in the corporate
loan agreement and for notifying holders of corporate loans of any failures of
compliance. Typically, under corporate loan agreements, the agent bank is given
broad discretion in enforcing the corporate loan agreement, and is obligated to
use only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and portfolioing the corporate loan and
other fees paid on a continuing basis.
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A financial institution's employment as an agent bank may be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Portfolio were determined
by an appropriate regulatory authority or court to be subject to the claims of
the agent bank's general or secured creditors, the Portfolio might incur certain
costs and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When the Portfolio acts as co-lender in connection with a Participation Interest
or when the Portfolio acquires a Participation Interest the terms of which
provide that the Portfolio will be in privity of contract with the corporate
borrower, the Portfolio will have direct recourse against the borrower in the
event the borrower fails to pay scheduled principal and interest. In all other
cases, the Portfolio will look to the agent bank to enforce appropriate credit
remedies against the borrower. In acquiring Participation Interests the
Portfolio will conduct analysis and evaluation of the financial condition of
each such co-lender and participant to ensure that the Participation Interest
meets the Portfolio's qualitative standards. There is a risk that there may not
be a readily available market for loan participation interests and, in some
cases, this could result in the Portfolio disposing of such securities at a
substantial discount from face value or holding such security until maturity.
When the Portfolio is required to rely upon a lending institution to pay the
Portfolio principal, interest, and other amounts received by the lending
institution for the loan participation, the Portfolio will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification and concentration of the Portfolio's investment portfolio. The
Portfolio considers loan participation interests not subject to puts to be
illiquid.
INVESTMENT RESTRICTIONS
These restrictions, unless otherwise indicated, are all fundamental policies of
the Portfolio and cannot be changed without the affirmative vote of a majority
of the outstanding interests of the Portfolio, which is defined in the 1940 Act
as the affirmative vote of the holders of the lesser of: (1) 67% or more of the
interests present at a meeting of interestholders, if the holders of more than
50% of the outstanding interests are represented at the meeting in person or by
proxy; or (2) more than 50% of the outstanding interests.
The following investment restrictions restate or are in addition to those
described under "Investment Objective and Policies" and "Other Investment
Practices and Risk Considerations" in Part A. Except as required by the 1940
Act, if any percentage restriction on investment or utilization of assets is
adhered to at the time an investment is made, a later change in percentage
resulting from a change in the market values of the Portfolio's assets or
purchases and redemptions of interests will not be considered a violation of the
limitation.
FUNDAMENTAL POLICIES. The following investment restrictions are fundamental
policies of the Portfolio.
CONCENTRATION. The Portfolio may not concentrate investments in any
particular industry; therefore, the Portfolio will not purchase the
securities of companies in any one industry if, thereafter, 25% or more
of the Portfolio's total assets would consist of securities of
companies in that industry. This restriction does not apply to
obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities (or repurchase agreements with respect thereto).
An investment of more than 25% of the Portfolio's assets in the
securities of issuers located in one country does not contravene this
policy.
BORROWING. The Portfolio may not borrow money in excess of
33-1/3% of its total assets taken at market value (including the amount
borrowed) and then only from a bank as a temporary measure for
extraordinary or emergency purposes, including to meet redemptions or
to settle securities transactions that may otherwise require untimely
dispositions of portfolio securities.
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REAL ESTATE. The Portfolio may not purchase or sell real estate,
provided that the Portfolio may invest in securities issued by
companies that invest in real estate or interests therein.
LENDING. The Portfolio may not make loans to other persons, provided
that for purposes of this restriction, entering into repurchase
agreements or acquiring any otherwise permissible debt securities
including engaging in securities lending shall not be deemed to be the
making of a loan.
COMMODITIES. The Portfolio may not invest in commodities or commodity
contracts, except that, subject to the restrictions described in Part A
and elsewhere in this Part B, the Portfolio may: (1) enter into futures
contracts and options on futures contracts; (2) enter into foreign
forward currency exchange contracts and foreign currency options; (3)
purchase or sell currencies on a spot or forward basis; and (4) may
enter into futures contracts on securities, currencies or on indices of
such securities or currencies, or any other financial instruments, and
may purchase and sell options on such futures contracts.
UNDERWRITING. The Portfolio may not underwrite securities issued by
other persons except to the extent that, in connection with the
disposition of its portfolio investments, it may be deemed to be an
underwriter under U.S. securities laws.
SENIOR SECURITIES. The Portfolio may not issue senior securities except
to the extent permitted by the 1940 Act.
NON-FUNDAMENTAL POLICIES. The following investment restrictions are
non-fundamental policies of the Portfolio.
LIQUIDITY AND RESTRICTED SECURITIES. 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 illiquid securities (securities
that cannot be disposed of within seven days at their then-current
value), including repurchase agreements not entitling the holder to
payment of principal within seven days and securities that are not
readily marketable by virtue of restrictions on the sale of such
securities to the public without registration under the Securities Act
of 1933, as amended ("Restricted Securities"). Illiquid securities do
not include securities that can be sold to the public in foreign
markets or that may be eligible for resale to qualified institutional
purchasers pursuant to Rule 144A under the Securities Act of 1933 that
are determined to be liquid by the investment adviser pursuant to
guidelines adopted by the Trust's Board of Trustees.
INVESTING FOR CONTROL. The Portfolio may not make investments for the
purpose of exercising control or management, except in connection with
a merger, consolidation, acquisition, or reorganization with another
investment company or series thereof. (Investments by the Portfolio in
wholly owned investment entities created under the laws of certain
foreign countries will not be deemed the making of investments for the
purpose of exercising control or management.)
OIL, GAS AND MINERAL INVESTMENTS. The Portfolio may not invest in
interests in oil, gas or other mineral exploration, resource, or lease
transactions or development programs but may purchase readily
marketable securities of companies that operate, invest in, or sponsor
such programs.
OTHER INVESTMENT COMPANIES. The Portfolio may acquir or
retain the securities of any other investment company to the extent
permitted by the 1940 Act, including in connection with a merger,
consolidation, acquisition, or reorganization.
Except for the policies on borrowing and illiquid securities, the percentage
restrictions described above 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.
MANAGEMENT OF THE TRUST
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OFFICERS AND TRUSTEES
The following information relates to the principal occupations during the past
five years of each Trustee and executive officer of the Trust and shows the
nature of any affiliation with SCMI. Except as noted, each of these individuals
currently serves in the same capacity for Schroder Capital Funds (Delaware),
Schroder Capital Funds and Schroder Series Trust, other registered investment
companies in the Schroder family of funds. If no address is shown, the person's
address is that of the Trust, Two Portland Square, Portland, Maine 04101.
PETER E. GUERNSEY, 75 - Trustee of the Trust; Insurance Consultant
since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
JOHN I. HOWELL, 80 - 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 - Trustee of the Trust; Chairman of the Board
of Directors, Josiah Macy, Jr. Foundation (charitable foundation).
HERMANN C. SCHWAB, 77 - Chairman and Trustee of the Trust; retired
since March, 1988; prior thereto, consultant to SCMI since February 1,
1984.
HON. DAVID N. DINKINS, 69 - Trustee of the Trust; Professor, Columbia
University School of International and Public Affairs; Director,
American Stock Exchange, Carver Federal Savings Bank, Transderm
Laboratory Corporation, and The Cosmetic Center, Inc.; formerly,
Mayor, The City of New York.
PETER S. KNIGHT, 46 - Trustee of the Trust; Partner, Wunder, Knight,
Levine, Thelen & Forcey; Director, Comsat Corp., Medicis
Pharmaceutical Corp., and Whitman Education Group Inc., Formerly,
Campaign Manager, Clinton/Gore `96.
SHARON L. HAUGH*, 51, 787 Seventh Avenue, New York, New York - Trustee
of the Trust; Chairman, Schroder Capital Management Inc. ("SCM"),
Executive Vice President and Director, SCMI; Chairman and Director,
Schroder Advisors.
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
Schroder U.S. Holdings Inc. 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.
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FERGAL CASSIDY, 28, 787 Seventh Avenue, New York, New York - Treasurer
of the Trust.
JOHN Y. KEFFER, 54 - Vice President of the Trust; President of Forum
Financial Group, LLC, parent of Forum Accounting Services, LLC and
Forum Administrative Services, LLC.
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, 37, 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 - Assistant Treasurer and Assistant Secretary of
the Trust; Relationship Manager and Counsel, Forum Administrative
Services, LLC 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 July 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.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
In addition to the Trust, the term "Fund Complex" includes three other
registered investment companies -- Schroder Capital Funds, an open-end,
management investment company; Schroder Capital Funds (Delaware), an open-end,
management investment company; and Schroder Series Trust, an open-end,
management investment company -- for which SCMI serves as investment adviser for
each series.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Trust. Independent Trustees of the Trust receive
an annual retainer from the Fund Complex of $11,000 and additional fees of
$1,250 per meeting attended in person or $500 per meeting attended by telephone.
Members of an Audit Committee for one or more of the investment companies
receive an additional $1,000 per year. Payment of the annual retainer is
allocated among the various investment companies based on their relative net
assets. Payment of meeting fees is allocated only among those investment
companies to which the meeting relates. None of the registered investment
companies in the Fund Complex has any bonus, profit sharing, pension or
retirement plans.
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The following table provides the fees paid to each independent Trustee of the
Trust for the year ended December 31, 1997.
<TABLE>
<S> <C> <C> <C> <C>
PENSION OR TOTAL COMPENSATION
RETIREMENT BENEFITS FROM FUND COMPLEX
AGGREGATE ACCRUED AS PART OF ESTIMATED ANNUAL PAID TO TRUSTEES ($)
COMPENSATION FROM TRUST EXPENSES ($) BENEFITS UPON
NAME OF TRUSTEE THE TRUST ($) RETIREMENT ($)
- ---------------------------- --------------------- --------------------- --------------------- ---------------------
Mr. Guernsey 31.58 0 0 3,983.42
Mr. Howell 31.58 0 0 14,983.42
Mr. Michalis 22.22 0 0 2,483.42
Mr. Schwab 1047.88 0 0 7,983.42
Mr. Dinkins 0.00 0 0 11,000.00
Mr. Knight 15.28 0 0 11,983.42
</TABLE>
As of March 31, 1998, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Trust's outstanding interests.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1998, the following are the principal interestholders in the
Portfolio. Persons owning more than 25% of the outstanding Interests in the
Portfolio may be deemed to control the Portfolio.
<TABLE>
<S> <C> <C>
NUMBER OF UNITS OF PERCENTAGE OF
INTERNATIONAL BOND PORTFOLIO BENEFICIAL INTEREST PORTFOLIO OWNED
------------------- ---------------
Thomas Carter Lupton, Trustee 737,619 38.15%
c/o SCMI Ltd.
33 Gutter Lane
London EC2V 8AS, United Kingdom
281,335 14.55%
Sealaska Corporation -- Investment and Growth Fund
One Sealaska Plaza
Juneau, Alaska 99801
897,455 46.42%
Sealaska Corporation -- Permanent Fund
One Sealaska Plaza
Juneau, Alaska 99801
</TABLE>
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 (as
well as SCM) is a wholly owned U.S. subsidiary of Schroder U.S. Holdings, Inc.,
an indirect, wholly owned U.S. 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
funds under management in excess of $175 billion as of September 30, 1997.
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Under an investment advisory agreement between the Trust and SCMI, 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, SCMI is responsible for making
decisions relating to the Portfolio's investments and placing 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
inside information that may be in its possession or in the possession of its
affiliates.
The investment advisory agreement continues in effect provided such continuance
is approved annually: (1) by the vote 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 the agreement or
"interested persons" (as defined in the 1940 Act) of any party to the agreement.
The investment advisory agreement with respect to the Portfolio may be
terminated without penalty by vote of the Trustees or the interestholders of the
Portfolio, in each case on 60 days' written notice to SCMI, or by SCMI on 60
days' written notice to the Trust. The agreements terminate automatically if
assigned. The 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 SCMI's or their duties or by reason of reckless
disregard of its or their obligations and duties under the agreement.
The following shows, respectively, the dollar amount of advisory fees payable
had certain waivers not been in place, together with the dollar amount of fees
waived and the dollar amount of other expenses reimbursed by SCMI to the
Portfolio for the first full year of operation of the Portfolio, ended December
31, 1997: $53,529, $53,529, and $6,549. SCMI is entitled to receive an advisory
fee at the annual rate of 0.50%, calculated monthly, on the average daily net
assets of the Portfolio. As stated in Part A, SCMI has currently waived payment
of the advisory fee until such time as the Board of Trustees of the Trust agrees
otherwise.
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,
and a subadministration agreement with Forum. Under these 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 SCMI's
investment advisory agreements. These services include, among other things: (1)
preparation of shareholder reports and communications; (2) regulatory
compliance, such as reports to and filings with the SEC and state securities
commissions; and (3) general supervision of the operation of the Portfolio,
including coordination of the services performed by SCMI and the interestholder
recordkeeper and portfolio accountant, 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.
The administration and subadministration agreements are terminable with respect
to the Portfolio without penalty, at any time, by the Board on 60 days' written
notice to Schroder Advisors or Forum, as applicable, or by Schroder Advisors or
Forum on 60 days' written notice to the Trust.
The dollar amount of administration and subadministration fees payable with
respect to the Portfolio had certain waivers not been in place, together with
the dollar amount of fees waived and the dollar amount of net fees paid for the
fiscal year ended December 31, 1977 is as follows: (1) with respect to Schroder
Advisors, $10,706, $10,706, and $0; and (2) with respect to Forum, $25,000,
$25,000, and $0. The fee rates are set forth in Part A.
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<PAGE>
INTERESTHOLDER RECORDKEEPING AND PORTFOLIO ACCOUNTING
FFC, an affiliate of Forum, performs interestholder recordkeeping and portfolio
accounting services for the Portfolio pursuant to an agreement with the Trust.
The agreement is terminable with respect to the Portfolio without penalty, at
any time, by the Board upon 60 days' written notice to FFC or by FFC upon 60
days' written notice to the Trust.
Under its agreement, FFC prepares and maintains the interestholder and
accounting books and records of the Portfolio that are required to be maintained
under the 1940 Act, calculates the net asset value of the Portfolio, calculates
the distributive share of the Portfolio's income, expense, gain and loss
allocable to each interestholder and prepares periodic reports to
interestholders and the SEC. For its interestholder recordkeeping services to
the Portfolio, FFC is entitled to a fee of $12,000 per year, plus certain other
charges. For its portfolio accounting services to the Portfolio, FFC is entitled
to receive from the Trust a fee of $36,000 per year and an additional $24,000
per year with respect to global and international portfolios. In addition, FFC
also is entitled to an additional $12,000 per year with respect to portfolios
with more than 25% of their total assets invested in asset-backed securities,
portfolios that have more than 100 security positions, or portfolios that have a
monthly portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering its services
and is not liable to the Trust for any action or inaction in the absence of bad
faith, willful misconduct or gross negligence. FFC is not responsible or liable
for any failure or delay in performance of its obligations arising out of or
caused, directly or indirectly, by circumstances beyond its reasonable control.
The Trust has agreed to indemnify and hold harmless FFC and its employees,
agents, officers and directors against and from any and all claims, demands,
actions, suits, judgments, liabilities, losses, damages, costs, charges, counsel
fees and all other expenses arising out of or in any way related to FFC's
actions taken or failures to act with respect to the Portfolio or based, if
applicable, upon information, instructions or requests with respect to the
Portfolio given or made to FFC by an officer of the Trust duly authorized. This
indemnification does not apply to FFC's actions taken or failures to act in
cases of FFC's own bad faith, willful misconduct or gross negligence.
The dollar amount of fees payable to FFC for interestholder recordkeeping and
portfolio accounting services, had certain waivers not been in place, together
with the dollar amount of the waiver, and the dollar amount of fees paid for the
fiscal year ending December 31, 1997 was: $74,123, $36,123, and $38,000.
CUSTODIAN
The Chase Manhattan Bank, 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. Under 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 Portfolio.
YEAR 2000 DISCLOSURE
The Portfolio receives services from SCMI, Schroder Advisors, Forum, FFC, The
Chase Manhattan Bank and others which rely on the smooth functioning of their
respective systems and the systems of others to perform those services. It is
generally recognized that certain systems in use today may not perform their
intended functions
36
<PAGE>
adequately after the year 1999 because of the inability of the software to
distinguish the year 2000 from the year 1900. Schroder Advisors is taking steps
that it believes are reasonably designed to address this potential "Year 2000"
problem and to obtain satisfactory assurances that comparable steps are being
taken by each of the Portfolio's other major service providers. There can be no
assurance, however, that these steps will be sufficient to avoid any adverse
impact on the Portfolio from this problem.
BROKERAGE ALLOCATION AND OTHER PRACTICES
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for SCMI's other investment advisory
clients 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, and a particular security
may be 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 other 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 that, 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 of negotiated brokerage commissions. Such commissions vary among
brokers. Also, a particular broker may charge different commissions according to
the difficulty and size of the transaction; for example, transactions in foreign
securities generally involve the payment of fixed brokerage commissions, which
are generally higher than those in the U.S. 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. However, SCMI seeks to
achieve the best net results in effecting its portfolio transactions. There is
generally less governmental supervision and regulation of foreign stock
exchanges and brokers than in the U.S. There is generally no stated commission
in the case of securities traded in the over-the-counter markets, but the price
paid usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid includes a disclosed, fixed commission or
discount retained by the underwriter or dealer.
The Portfolio's advisory agreement authorizes and directs SCMI to place orders
for the purchase and sale of the Portfolio's investments with brokers or dealers
SCMI selects and to seek "best execution" of portfolio transactions. SCMI places
all such orders for the purchase and sale of portfolio securities and buys and
sells securities through a substantial number of brokers and dealers. In so
doing, SCMI uses its best efforts to obtain 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 considers all factors it deems relevant, including price, transaction size,
the nature of the market for the security, the commission amount, 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.
Historically, investment advisers, including advisers of investment companies
and other institutional investors, have received research services from
broker-dealers that execute portfolio transactions for the advisers' clients.
Consistent with this practice, SCMI may receive research services from
broker-dealers with which it places 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 other portfolios), although not all of these services are
necessarily useful and of
37
<PAGE>
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, as
amended, SCMI may cause the Portfolio to pay to a broker-dealer that provides
SCMI with "brokerage and research services" (as defined in that Section) an
amount of disclosed commission for effecting a securities transaction in excess
of the commission that another broker-dealer would have charged for effecting
that transaction. In addition, although it does not do so currently, SCMI may
allocate brokerage transactions to broker-dealers who have entered into
arrangements under which the broker-dealer allocates a portion of the
commissions paid by the Portfolio toward payment of Portfolio expenses, such as
custodian fees.
Subject to the general policies of the Portfolio regarding allocation of
portfolio brokerage as set forth above, the Board has authorized SCMI to employ:
(1) Schroder & Co. Inc., an affiliate of SCMI, to effect securities transactions
of the Portfolio on the New York Stock Exchange only; and (2) Schroder
Securities Limited and its affiliates (collectively, "Schroder Securities"),
affiliates of SCMI, to effect securities transactions of the Portfolio on
various foreign securities exchanges on which Schroder Securities has trading
privileges, provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder Securities for effecting brokerage
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on a securities exchange paid by
the Portfolio to a broker that 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 policy
of the Portfolio that commissions paid to Schroder Securities will, in SCMI's
opinion, be: (1) at least as favorable as commissions contemporaneously charged
by Schroder Securities, as the case may be, on comparable transactions for their
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 under the
1940 Act to ensure that commissions paid to Schroder & Co. Inc. or Schroder
Securities by the Portfolio satisfy these standards. Such procedures are
reviewed periodically by the Board, including a majority of the non-interested
Trustees. The Board also reviews all transactions at least quarterly for
compliance with such procedures.
It is further a policy of the Portfolio that all such transactions effected by
Schroder Securities on the New York Stock Exchange be in accordance with Rule
11a2-2(T) promulgated under the Securities Exchange Act of 1934, as amended,
which requires in substance that a member of such exchange not associated with
Schroder Securities actually execute the transaction on the exchange floor or
through the exchange facilities. Thus, while Schroder Securities will bear
responsibility for determining important elements of execution such as timing
and order size, another firm will actually execute the transaction.
Schroder Securities pays a portion of the brokerage commissions it receives from
the Portfolio to the brokers executing the transactions on the New York Stock
Exchange. In accordance with Rule 11a2-2(T), the Trust has entered into an
agreement with Schroder Securities permitting it to retain a portion of the
brokerage commissions paid to it by the Portfolio. The Board, including a
majority of the non-interested Trustees, has approved this agreement.
The Portfolio does not have any understanding or arrangement to direct any
specific portion of its brokerage to Schroder Securities, and none will direct
brokerage to Schroder Securities in recognition of research services.
From time to time, the Portfolio may purchase securities of a broker or dealer
through which it regularly engages in securities transactions.
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<PAGE>
The dollar amount of brokerage commissions paid by the Portfolio for the fiscal
year ended December 31, 1997 was $297. In addition: (1) the dollar amount of
brokerage commissions; (2) percentage of brokerage commissions; and (3)
percentage of commission transactions executed through each of Schroder & Co.
Inc. and Schroder Securities Limited is: (1) $0; (2) 0.00%; and (3) 0.00% for
the fiscal year ended December 31, 1997.
CAPITAL STOCK AND OTHER SECURITIES
Under the Trust's Trust Instrument, the Trustees are authorized to issue
beneficial interests 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 of the Trust
will all vote together in certain circumstances (e.g., election of the Trustees)
as required by the 1940 Act. One or more portfolios of the Trust 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 the Portfolio). Except for certain matters
specifically described in the Trust Instrument, the Trustees may amend the 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 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 the 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. 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 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 its 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, SCMI believes that the
risk of personal liability to a Trust interestholder is remote.
Under federal securities law, any person or entity that signs a registration
statement may be liable for a misstatement or omission of a material fact in the
registration statement. The Trust, the Trustees and certain officers are
required to sign the registration statement and amendments thereto of certain
registered investment companies that invest in the Portfolio. In addition, under
federal securities law, the Trust may be liable for misstatements or omissions
of a material fact in any proxy soliciting material of a publicly offered
investment company investor in the Trust. Each such investor in the Portfolio
has agreed to indemnify the Trust, the Trustees and officers ("Indemnitees")
against certain claims.
Indemnified claims are those brought against Indemnitees based on a misstatement
or omission of a material fact in the investor's registration statement or proxy
materials. No indemnification need be made, however, if such alleged
misstatement or omission relates to information about the Trust and was supplied
to the investor by the Trust. Similarly, the Trust will indemnify each investor
in the Portfolio, for any claims brought against the investor with
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<PAGE>
respect to the investor's registration statement or proxy materials, to the
extent the claim is based on a misstatement or omission of a material fact
relating to information about the Trust that is supplied to the investor by the
Trust. In addition, certain registered investment company investors in the
Portfolio will indemnify each Indemnitee against any claim based on a
misstatement or omission of a material fact relating to information about a
series of the registered investment company that did not invest in the Trust.
The purpose of these cross-indemnity provisions is principally to limit the
liability of the Trust to information that it knows or should know and can
control.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES
PRIVATE SALE OF INTERESTS
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 per Interest next determined after an order is received by the
Portfolio. 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
of the Portfolio outstanding.
Each investment in the Portfolio is in the form of a non-transferable beneficial
interest.
DETERMINATION OF NET ASSET VALUE
The Board has established the time for (see Part A) and the following procedures
for the valuation of the Portfolio's securities: (1) equity securities listed or
traded on the New York or American Stock Exchange or other domestic or foreign
stock exchange are valued at their latest sale prices on such exchange that day
prior to the time when assets are valued; in the absence of sales that day, such
securities are valued at the mid-market prices (in cases where securities are
traded on more than one exchange, the securities are valued on the exchange
designated as the primary market by the Portfolio's investment adviser); (2)
unlisted equity securities for which over-the-counter market quotations are
readily available are valued at the latest available mid-market prices prior to
the time of valuation; (3) securities (including restricted securities) not
having readily-available market quotations are valued at fair value under the
Board's procedures; (4) debt securities having a maturity in excess of 60 days
are valued at the mid-market prices determined by the Portfolio pricing service
or obtained from active market makers on the basis of reasonable inquiry; and
(5) short-term debt securities (having a remaining maturity of 60 days or less)
are valued at cost, adjusted for amortization of premiums and accretion of
discount.
When an option is written, an amount equal to the premium received is recorded
in the books as an asset, and an equivalent deferred credit is recorded as a
liability. The deferred credit is adjusted ("marked-to-market") to reflect the
current market value of the option. Options are valued at their mid-market
prices in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last bid price as obtained
from two or more dealers unless there is only one dealer, in which case that
dealer's price is used. Futures contracts and related options are stated at
market value.
Open futures positions on debt securities will be valued at the most recent
settlement price, unless that price does not, in the judgment of the Board (or
SCMI under the Board's procedures), reflect the fair value of the contract, in
which case the positions will be valued under the Board's procedures.
REDEMPTIONS IN-KIND
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 Securities and Exchange
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.
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<PAGE>
In the event that payment for redeemed interests is made wholly or partly in
portfolio securities, interestholders may incur brokerage costs in converting
the securities to cash. An in-kind distribution of portfolio securities is
generally less liquid than cash. The interestholder may have difficulty finding
a buyer for portfolio securities received in payment for redeemed interests.
Portfolio securities may decline in value between the time of receipt by the
interestholder and conversion to cash. A redemption in-kind of portfolio
securities could result in a less diversified portfolio of investments for the
Portfolio and could affect adversely the liquidity of its investment portfolio.
TAX STATUS
PORTFOLIO AS A PARTNERSHIP
The Portfolio is classified for federal income tax purposes as a partnership
that is not a "publicly traded partnership." As a result, the Portfolio is not
subject to federal income tax; instead, each investor in the Portfolio is
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 is not subject to Delaware income or franchise
tax.
Each investor in the Portfolio is 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 invest substantially all of their assets in the Portfolio and
intend to qualify as RICs should 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: (1)
the amount of cash and the basis of any property the Portfolio distributes to
the investor; and (2) the investor's share of the Portfolio's losses.
INVESTMENTS IN FOREIGN SECURITIES
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 return on the security with respect to which the dividend
or interest is paid. 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, RICs and certain other
investors that hold stock of a PFIC (including indirect holding through an
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 interestholders. 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 interestholders.
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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 the Portfolio. In most instances it will
be very difficult, if not impossible, to make this election because of certain
requirements thereof.
The Portfolio's transactions in foreign currencies, foreign currency-denominated
debt securities and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned.
OTHER PORTFOLIO INVESTMENTS
If the Portfolio engages in hedging transactions, including hedging transactions
in options, futures contracts, and straddles, or other similar transactions, it
will be subject to special tax rules (including constructive sale,
mark-to-market, straddle, wash sale, and short sale rules), the effect of which
may be to accelerate income to the Portfolio, defer losses to the Portfolio,
cause adjustments in the holding periods of the Portfolio's securities, or
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of interestholder
income. The Portfolio will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interests of the
Portfolio.
"Constructive sale" provisions apply to activities by the Portfolio which
lock-in gain on an "appreciated financial position". Generally, a "position" is
defined to include stock, a debt instrument, or partnership interest, or an
interest in any of the foregoing, including through a short sale, a swap
contract, or a future or forward contract. The entry into a short sale, a swap
contract or a future or forward contract relating to an appreciated direct
position in any stock or debt instrument, or the acquisition of stock or debt
instrument at a time when the Portfolio occupies an offsetting (short)
appreciated position in the stock or debt instrument, is treated as a
"constructive sale" that gives rise to the immediate recognition of gain (but
not loss). The application of these provisions may cause the Portfolio to
recognize taxable income from these offsetting transactions in excess of the
cash generated by such activities.
WITHHOLDING
Ordinary income paid to interestholders who are nonresident aliens are subject
to a 30% U.S. withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
interestholders are urged to consult their own tax advisors concerning the
applicability of the U.S. withholding tax.
The Trust is required to report to the IRS all distributions and gross proceeds
from the redemption of Interests (except in the case of certain exempt
interestholders). All such distributions and proceeds generally will be subject
to the withholding of federal income tax at a rate of 31% ("backup withholding")
in the case of non-exempt interestholders if: (1) the interestholder fails to
furnish the Trust with and to certify the interestholder's correct taxpayer
identification number; (2) the IRS notifies the Trust that the interestholder
has failed to report properly certain interest and dividend income to the IRS
and to respond to notices to that effect; or (3) when required to do so, the
interestholder fails to certify that it is not subject to backup withholding. If
the withholding provisions are applicable, any such distributions or proceeds
will be reduced by the amount required to be withheld. Any amounts withheld may
be credited against the interestholder's federal income tax liability.
In some circumstances, new federal tax regulations (effective for payments made
on or after January 1, 1999, although transition rules will apply) will increase
the certification and filing requirements imposed on foreign investors in order
to qualify for exemption from the 31% back-up withholding tax and for reduced
withholding tax rates under income tax treaties. Foreign investors in the
Portfolio should consult their tax advisors with respect to the potential
application of these new regulations.
GENERAL
42
<PAGE>
The income tax and estate tax consequences to a non-U.S. interestholder entitled
to claim the benefits of an applicable tax treaty may be different from those
described herein. Non-U.S. interestholders may be required to provide
appropriate documentation to establish their entitlement to the benefits of such
a treaty. Non-U.S. interestholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Portfolio.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. persons (I.E., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Income from the Portfolio also may be subject
to foreign, state and local taxes, and treatment of the Portfolio under foreign,
state and local income tax laws may differ from the federal income tax
treatment. Interestholders should consult their tax advisors with respect to
particular questions of federal, foreign, state and local taxation.
PLACEMENT AGENT
Forum Financial Services, Inc., Two Portland Square, Portland, Maine 04101,
serves as the Trust's placement agent (underwriter). The placement agent
receives no compensation for such placement agent services.
CALCULATIONS OF PERFORMANCE DATA
The Portfolio calculates its yields and returns in accordance with SEC
prescribed formulas. The Portfolio may also calculate performance information
using other methodologies.
FINANCIAL STATEMENTS
The fiscal year end of the Portfolio is December 31.
Financial statements for the Portfolio's semi-annual period and fiscal year will
be distributed to interestholders. The Board in the future may change the fiscal
year end of the Portfolio; the tax year end of the Portfolio may change due to
the year ends of the interestholders under certain circumstances.
The audited financial statements of the Portfolio for the year ended December
31, 1997, including the independent auditors' report thereon, are contained in
Exhibit 12 of Part C of Amendment No. 2 to the Trust's Registration Statement on
Form N-1A (File No. 811-7993) filed with the Securities and Exchange Commission
on April 30, 1998, and are incorporated by reference herein.
43
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
"Aaa" Fixed-income securities which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa" Fixed-income securities which are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group they comprise what are
generally known as high grade fixed-income securities. They are rated lower than
the best fixed-income securities because margins of protection may not be as
large as in "Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A" Fixed-income securities which are rated "A" possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
"Baa" Fixed-income securities which are rated "Baa" are considered as medium
grade obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such fixed-income securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Fixed-income securities rated "Aaa", "Aa", "A" and "Baa" are considered
investment grade.
"Ba" Fixed-income securities which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and
therefore not well safeguarded during both good and bad times in the future.
Uncertainty of position characterizes bonds in this class.
"B" Fixed-income securities which are rated "B" generally lack characteristics
of the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" Fixed-income securities which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
"Ca" Fixed-income securities which are rated "Ca" present obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" Fixed-income securities which are rated "C" are the lowest rated class of
fixed-income securities, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
44
<PAGE>
Rating Refinements: Moody's may apply numerical modifiers, "1", "2",
and "3" in each generic rating classification from "Aa" through "B" in its
municipal fixed-income security rating system. The modifier "1" indicates that
the security ranks in the higher end of its generic rating category; the
modifier "2" indicates a mid-range ranking; and a modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. The ratings apply to Municipal Commercial Paper as well as taxable
Commercial Paper. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: "Prime-1", "Prime-2", "Prime-3".
Issuers rated "Prime-1" have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" have a strong
capacity for repayment of short-term promissory obligations; and Issuers rated
"Prime-3" have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATING GROUP("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
"AAA" Fixed-income securities rated "AAA" have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
"AA" Fixed-income securities rated "AA" have a very strong capacity to pay
interest and repay principal and differs from the highest-rated issues only in
small degree.
"A" Fixed-income securities rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than fixed-income
securities in higher-rated categories.
"BBB" Fixed-income securities rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for fixed-income securities in this category than for
fixed-income securities in higher-rated categories.
45
<PAGE>
Fixed-income securities rated "AAA", "AA", "A" and "BBB" are considered
investment grade.
"BB" Fixed-income securities rated "BB" have less near-term vulnerability to
default than other speculative grade fixed-income securities. However, it faces
major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity or willingness to
pay interest and repay principal.
"B" Fixed-income securities rated "B" have a greater vulnerability to default
but presently have the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions would likely
impair capacity or willingness to pay interest and repay principal.
"CCC" Fixed-income securities rated "CCC" have a current identifiable
vulnerability to default, and the obligor is dependent upon favorable business,
financial and economic conditions to meet timely payments of interest and
repayments of principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal.
"CC" The rating "CC" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or implied "CCC" rating.
"C" The rating "C" is typically applied to fixed-income securities subordinated
to senior debt which is assigned an actual or implied "CCC-" rating.
"CI" The rating "CI" is reserved for fixed-income securities on which no
interest is being paid.
"NR" Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest degree of speculation. While such fixed-income securities will
likely have some quality and protective characteristics, these are out-weighed
by large uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" TO "CCC" may be modified by the
addition of a plus or minus sign to show relative standing with the major
ratings categories.
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. Ratings are graded into group
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
Issues assigned "A" ratings are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation "1", "2", and "3" to indicate the relative degree of safety.
"A-1" Indicates that the degree of safety regarding timely payment is very
strong.
"A-2" Indicates capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".
46
<PAGE>
"A-3" Indicates a satisfactory capacity for timely payment. Obligations carrying
this designation are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
47
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements
Part A: Not applicable
Part B: Not applicable
(b) Exhibits:
(1) Trust Instrument of Registrant dated as of December
26, 1996. *
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Investment Advisory Agreement between Registrant and
Schroder Capital Management International Inc.
("SCMI") with respect to Schroder International Bond
Portfolio dated as of December 27, 1996. *
(6) Not required.
(7) Not applicable.
(8) Global Custody Agreement between Registrant and The
Chase Manhattan Bank with respect to Schroder
International Bond Portfolio dated as of December 27,
1996. *
(9)
(a) Administration Agreement between Registrant
and Schroder Fund Advisors Inc.
with respect to Schroder International Bond
Portfolio Dated as of December 27, 1996. *
(b) Sub-Administration Agreement between
Registrant and Forum Administrative
Services, LLC ("FAdS") with respect to
Schroder International Bond Portfolio dated
as of December 27, 1996. *
(c) Transfer Agency and Fund Accounting
Agreement Between Registrant and Forum
Financial Corp. ("FFC") with respect to
Schroder International Bond Portfolio dated
as of December 27, 1996. *
(d) Placement Agent Agreement Between the Trust
and Forum Financial Services, Inc.
("FFS") with respect to Schroder
International Bond Portfolio dated as of
December 27, 1996 (filed herewith).
(10) Not required.
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<PAGE>
(11) Not required.
(12) Audited financial statements for Schroder
International Bond Portfolio for the fiscal period
ended December 31, 1997, including: Schedule of
Investments; Statement of Assets and Liabilities;
Statement of Operations; Statement of Changes in Net
Assets; Financial Highlights; Notes to Financial
Statements; and Report of Independent Accountants
dated February 23, 1998 filed herewith.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Not required.
(17) Financial Data Schedule for Schroder International
Bond Portfolio (filed herewith).
(18) Not applicable.
---------------
(*) Incorporated by reference as filed on Amendment No. 1 via
EDGAR on August 18, 1997, accession number. 0001004402-97-
00057).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<S> <C>
-------------------------------------------------------------------------- -------------------------------
Number of Recordholders
Title of Class of Shares of Beneficial Interest as of March 31, 1998
-------------------------------------------------------------------------- -------------------------------
-------------------------------------------------------------------------- -------------------------------
Schroder International Bond Portfolio 3
-------------------------------------------------------------------------- -------------------------------
</TABLE>
ITEM 27. INDEMNIFICATION
Registrant currently holds a joint directors' and officers' errors and
omissions insurance policy pursuant to Rule 17d-1(d)(7). Additionally,
the Trust's trustees and officers are insured under a joint 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 the Trust 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 Agreement provide that
SCMI shall not be liable for any mistake of judgment or in any event
whatsoever, except for lack of good faith, provided that nothing shall
49
<PAGE>
be deemed to protect, or purport to protect, SCMI against any liability
to Registrant or to Registrant's interestholders to which SCMI 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 SCMI's reckless disregard of its obligations and duties
thereunder. 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
Administrative Services, LLC. in the Sub-Administration Agreement, (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, Ltd. ("Schroder Ltd."), is the United Kingdom affiliate
of SCMI.
<TABLE>
<S> <C> <C>
---------------------------------- ------------------------------------ ----------------------------------
Name Title Business Connections
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
David M. Salisbury Chief Executive Officer, Director, SCMI
Chairman
------------------------------------ ----------------------------------
Chief Executive, Director Schroder Ltd.
------------------------------------ ----------------------------------
Director Schroders plc.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Richard R. Foulkes Deputy Chairman/Executive Vice SCMI
President
------------------------------------ ----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
John A. Troiano Chief Executive, Director SCMI
------------------------------------
----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
David Gibson Senior Vice President, Director SCMI
------------------------------------ ----------------------------------
Director Schroder Capital Management
------------------------------------ ----------------------------------
Senior Vice President Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
John S. Ager Senior Vice President, Director SCMI
------------------------------------ ----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Sharon L. Haugh Executive Vice President, Director SCMI
----------------------------------
------------------------------------ ----------------------------------
Director, Chairman Schroder Advisors
------------------------------------ ----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
</TABLE>
50
<PAGE>
<TABLE>
<S> <C> <C>
---------------------------------- ------------------------------------ ----------------------------------
Gavin D. L. Ralston Senior Vice President, Managing SCMI
Director
------------------------------------ ----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Mark J. Smith Senior Vice President, Director SCMI
------------------------------------ ----------------------------------
Director Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Robert G. Davy Senior Vice President, Director SCMI
------------------------------------ ----------------------------------
Director Schroder Ltd.
------------------------------------ ----------------------------------
------------------------------------ ----------------------------------
Officer of open end investment companies
for which SCMI and/or its
affiliates provide investment
services
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Jane P. Lucas Senior Vice President, Director SCMI
------------------------------------ ----------------------------------
Director Schroder Advisors
------------------------------------ ----------------------------------
Director Schroder Capital Management
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
C. John Govett Director SCMI
------------------------------------ ----------------------------------
Group Managing Director Schroder Ltd.
----------------------------------
------------------------------------
Director Schroders plc.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Phillipa J. Gould Senior Vice President, Director SCMI
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Louise Croset First Vice President, Director SCMI
------------------------------------ ----------------------------------
First Vice President Schroder Ltd.
---------------------------------- ------------------------------------ ----------------------------------
---------------------------------- ------------------------------------ ----------------------------------
Abdallah Nauphal Group Vice President, Director SCMI
---------------------------------- ------------------------------------ ----------------------------------
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Forum Financial Services, Inc. is the Registrant's placement
agent. Registrant has no
underwriters.
(b) Not applicable.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS 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 04101. 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.
51
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
None.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as amended,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, duly authorized, in the City of New York and State of
New York on the 30th day of April, 1998.
SCHRODER CAPITAL FUNDS II
By:/S/ CATHERINE A. MAZZA
Catherine A. Mazza
Vice President
53
<PAGE>
INDEX TO EXHIBITS
Exhibit
9(d) Placement Agency Agreement.
12 Audited financial statements for Schroder International Bond Portfolio
for the fiscal period ended December 31, 1997, including: Schedule of
Investments; Statement of Assets and Liabilities; Statement of
Operations; Statement of Changes in Net Assets; Financial Highlights;
Notes to Financial Statements; and Report of Independent Accountants
dated February 23, 1998.
(17) Financial Data Schedule
54
Exhibit 9(d)
SCHRODER CAPITAL FUNDS II
PLACEMENT AGENT AGREEMENT
AGREEMENT made this 27th day of December, 1996, between Schroder
Capital Funds II (the "Trust"), a business trust organized under the laws of the
State of Delaware with its principal place of business at Two Portland Square,
Portland, Maine 04101, and Forum Financial Services, Inc. ("Forum"), a
corporation organized under the laws of State of Delaware with its principal
place of business at Two Portland Square, Portland, Maine 04101.
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "Act"), and is
authorized to issue interests (as defined in the Trust's Trust Instrument) in
separate series; and
WHEREAS, the Trust desires that Forum perform placement agent services
for each of the portfolios of the Trust as listed in Appendix A hereto (each a
"Portfolio," and collectively the "Portfolios") and Forum is willing to provide
those services on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
SECTION 1. SERVICES AS PLACEMENT AGENT
(a) Forum will act as Placement Agent of the Interests covered by the
Trust's registration statement then in effect under the 1940 Act. As Placement
Agent, Forum shall have the right to sell Interests of the Portfolios upon the
terms set forth in the Trust's registration statement, as such registration
statement is amended and in effect from time to time. In acting as Placement
Agent under the Placement Agency Agreement, neither Forum nor its employees nor
any agents thereof shall make any offer or sale of Interests in a manner which
would require the Interests to be registered under the Securities Act of 1933,
as amended (the "1933 Act"). As used in this Agreement the term "registration
statement" shall mean any registration statement filed with the Securities and
Exchange Commission (the "Commission") as modified by any amendments thereto
that at any time shall have been filed with the Commission by or on behalf of
the Trust.
(b) All activities by Forum and its agents and employees as Placement
Agent of Interests shall comply with all applicable laws, rules and regulations,
including without limitation, all rules and regulations adopted pursuant to the
1940 Act by the Commission.
(c) Nothing herein shall be construed to require the Trust to accept
any offer to purchase any Interests, all of which shall be subject to approval
by the Trust's Board of Trustees.
(d) The Trust shall furnish from time to time for use in connection
with the sale of Interests such information with respect to the Trust and
Interests as Forum may reasonably request. The Trust shall also furnish Forum
upon request with: (a) audited annual and unaudited semiannual statements of the
Trust's books and accounts prepared by the Trust, and (b) such additional
information regarding the Trust's financial or regulatory condition as Forum may
from time to time reasonably request.
(e) The Trust represents to Forum that all registration statements
filed by the Trust with the Commission under the 1940 Act with respect to
Interests have been prepared in conformity with the requirements of such statute
and rules and regulations of the Commission thereunder. The Trust represents and
warrants to Forum that any registration statement will contain all statements
required to be stated herein in conformity with both such statute and the rules
and regulations of the Commission; that all statements of fact contained in any
registration statement will be true and correct in all material respects at the
time of filing of such registration statements or amendments thereto; and that
no registration statement will include an untrue statement of a material fact or
omit to state a material fact required to be
55
<PAGE>
stated therein or necessary to make the statements therein not misleading to a
purchaser of Interests. The Trust may, but shall not be obligated to, propose
from time to time such amendment to any registration statement as in the light
of future developments may, in the opinion of the Trust's counsel, be necessary
or advisable. If the Trust shall not propose such amendment and/or supplement
within fifteen days after receipt by the Trust of a written request from Forum
to do so, Forum may, at its option, terminate this Agreement. The Trust shall
not file any amendment to any registration statement without giving Forum
reasonable notice thereof in advance; provided, however, that nothing contained
in this Agreement shall in any way limit the Trust's right to file at any time
such amendment to any registration statement as the Trust may deem advisable,
such right being in all respects absolute and unconditional.
(f) The Trust agrees to indemnify, defend and hold Forum, its several
officers and directors, and any person who controls Forum within the meaning of
Section 15 of the 1933 Act or Section 20 of the Securities Exchange Act of 1934
(the "1934 Act") (for purposes of this Section 1(f), collectively, "Covered
Persons") free and harmless from and against any and all claims, demands,
liabilities and any counsel fees incurred in connection therewith) which any
Covered Person may incur under the 1933 Act, the 1934 Act, common law or
otherwise, arising out of or based on any untrue statement of a material fact
contained in any registration statement, private placement memorandum or other
offering material ("Offering Material") or arising out of or based on any
omission to state a material fact required to be stated in any Offering Material
or necessary to make the statements in any Offering Material not misleading,
provided, however, that the Trust's agreement to indemnify Covered Persons shall
not be deemed to cover any claims, demands, liabilities or expenses arising out
of any financial and other statements as are furnished in writing to the Trust
by Forum in its capacity as Placement Agent for use in the answers to any items
of any registration statement or in any statements made in any Offering
Material, or arising out of or based on any omission or alleged omission to
state a material fact in connection with the giving of such information required
to be stated in such answers or necessary to make the answers not misleading;
and further provided that the Trust's agreement to Section 1(e) shall not be
deemed to cover any liability to the Trust or its investors to which a Covered
Person would otherwise be subject by reason or willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of a Covered
Person's reckless disregard of its obligations and duties under this Agreement.
The Trust shall be notified of any action brought against a Covered Person, such
notification to be given by letter or by telegram addressed to the Secretary of
the Trust, promptly after the summons or other first legal process shall have
been duly and completely served upon such Covered Person. The failure to notify
the Trust of any such action shall not relieve the Trust from any liability
except to the extent that the Trust shall have been prejudiced by such failure,
or from any liability that the Trust may have to the Covered Person against whom
such action is brought by reason of any such untrue statement or omission,
otherwise than on account of the Trust's indemnity agreement contained in this
Section 1(f). The Trust will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but in such case such
defense shall be conducted by counsel chosen by the Trust and approved by Forum,
the defendant or defendants in such suit shall bear the fees and expenses of any
additional counsel retained by any of them; but in case the Trust does not elect
to assume the defense of any such suit, or in case Forum reasonably does not
approve of counsel chosen by the Trust, the Trust will reimburse the Covered
Person named as defendant in such suit, for the fees and expenses of any counsel
retained by Forum or such Covered Person. The Trust's indemnification agreement
contained in this Section (f) and the Trust's representations and warranties in
this Agreement shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of Covered Persons, and shall survive the
delivery of any Interests. This agreement of indemnity will inure exclusively to
Covered Persons and their successors. The Trust agrees to notify Forum promptly
of the commencement of any litigation or proceedings against the Trust or any of
its officers or Trustees in connection with the issue and sale of any Interests.
(g) Forum agrees to indemnify, defend and hold the Trust, its several
officers and trustees, and any person who controls the Trust within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act (for purposes of
this Section 1(g) collectively, "Covered Persons") free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
costs of investigating or defending such claims, demands, liabilities and any
counsel fees incurred in connection therewith) that Covered Persons may incur
under the 1933 Act, the 1934 Act, or common law or otherwise, but only to the
extent that such liability or expense incurred by a Covered Person resulting
from such claims or demands shall arise out of or be based on any untrue
statement of a material fact contained in information furnished in writing by
Forum in its capacity as Placement Agent to the Trust for use in the answers to
any of the items of any registration statement or in any statements in any
Offering Material or shall arise out of or be based on any omission to state a
material fact in connection with such information furnished in writing by
56
<PAGE>
Forum to the Trust required to be stated in such answers or necessary to make
such information not misleading. Forum shall be notified of any action brought
against a Covered Person, such notification to be given by letter or telegram
addressed to Forum, Attention: Legal Department, promptly after the summons or
other first legal process shall have been duly and completely served upon such
Covered Person. Forum shall have the right of first control of the defense of
the action with counsel of its own choosing satisfactory to the Trust if such
action is based solely on such alleged misstatement or omission on Forum's part,
and in any other event each Covered Person shall have the right to participate
in the defense or preparation of the defense of any such action. The failure to
so notify Forum of any such action shall not relieve Forum from any liability
except to the extent that Forum shall have been prejudiced by such failure, or
from any liability that Forum may have to Covered Persons by reason of any such
untrue or alleged untrue statement, or omission or alleged omission, otherwise
than on account of Forum's indemnity agreement contained in this Section 1(g).
(h) No Interests shall be offered by either Forum or the Trust under
any of the provisions of this Agreement and no orders for the purchase or sale
of Interests hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement or any necessary amendments thereto
shall be suspended under any of the provisions of the 1940 Act; provided,
however, that nothing contained in this Section 1(h) shall in any way restrict
or have an application to or bearing on the Trust's obligation to redeem
Interests from any investor in accordance with the provisions of the Trust's
registration statement or Trust Instrument, as amended from time to time.
(i) The Trust agrees to advise Forum as soon as reasonably practical by
a notice in writing delivered to Forum or its counsel:
(i) of any request by the Commission for amendment to the
registration statement then in effect or for additional
information;
(ii) in the event of the issuance by the Commission of any
stop order suspending the effectiveness of the registration
statement then in effect or the initiation by service of
process on the Trust of any proceeding for that purpose;
(iii) of the happening of any event that makes untrue any
statement of a material fact made in the registration
statement then in effect or that requires the making of a
change in such registration statement in order to make the
statements therein not misleading; and
(iv) of all action of the Commission with respect to any
amendment to any registration statement that may from time to
time be filed with the Commission.
For purposes of this Section 1(i), informal requests by or acts of the
Staff of the Commission shall not be deemed actions or requests by the
Commission.
(j) Forum agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records and other
information not otherwise publicly available relative to the Trust and its
prior, present or potential investors and not to use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Trust, which approval shall not be unreasonably withheld and may not be
withheld where Forum may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
(k) In addition to Forum's duties as Placement Agent, the Trust
understands that Forum may, in its discretion, perform additional functions in
connection with transactions in Interests.
(l) Forum shall receive no fee for its services hereunder.
(m) The processing of Interest transactions may include, but is not
limited to, compilation of all transactions; creation of a transaction tape and
timely delivery of it to the Trust's transfer agent for processing;
57
<PAGE>
reconciliation of all transactions delivered to the Trust's transfer agent; and
the recording and reporting of these transactions executed by the Trust's
transfer agent in customer statements; and rendering of periodic customer
statements.
(n) Forum may also provide other investor services, such as
communicating with Trust investors and other functions in administering customer
accounts for Trust investors.
(o) Nothing herein is intended, nor shall be construed, as requiring
Forum to perform any of the foregoing functions.
SECTION 2. EFFECTIVENESS, DURATION AND TERMINATION
(a) This Agreement shall become effective with respect to each
Portfolio on the later of the date hereof or the date of commencement of
operations of the Trust, and with respect to each future portfolio of the Trust,
on the date this Agreement or Appendix A hereto is amended. Upon effectiveness
of this Agreement, it shall supersede all previous agreements between the
parties hereto covering the subject matter hereof insofar as such Agreement may
have been deemed to relate to the Portfolios.
(b) This Agreement shall continue in effect with respect to a Portfolio
for a period of one year from its effectiveness and shall continue in effect for
successive twelve-month periods; provided, however, that continuance is
specifically approved at least annually (i) by the Board or by a vote of a
majority of the outstanding voting interests of the Portfolio and (ii) by a vote
of a majority of Trustees of the Trust who are not parties to this agreement or
interested persons of any such party (other than as Trustees of the Trust);
provided further, however, that if the continuation of this agreement is not
approved as to a Portfolio, Forum may continue to render to the Portfolio the
services described herein in the manner and to the extent permitted by the Act
and the rules and regulations thereunder.
(c) This Agreement may be terminated with respect to a Portfolio at any
time, without the payment of any penalty, (i) by the Board on 60 days' written
notice to Forum or (ii) by Forum on 60 days' written notice to the Trust. This
agreement shall terminate upon assignment.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Forum and the Trust each hereby represents and warrants to the other
that it has all requisite authority to enter into, execute, deliver and perform
its obligations under this Agreement and that, with respect to it, this
Agreement is legal, valid and binding, and enforceable in accordance with its
terms.
SECTION 4. ACTIVITIES OF FORUM
Except to the extent necessary to perform Forum's obligations
hereunder, nothing herein shall be deemed to limit or restrict Forum's right, or
the right of any of Forum's officers, directors or employees who may also be a
trustee, officer or employee of the Trust, or persons otherwise affiliated
persons of the Trust to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, trust, firm, individual or association.
SECTION 5. LIMITATION OF INTEREST HOLDER AND TRUSTEE LIABILITY
The Trustees of the Trust and the interestholders of each Portfolio
shall not be liable for any obligations of the Trust or of the Portfolios under
this Agreement, and Forum agrees that, in asserting any rights or claims under
this Agreement, it shall look only to the assets and property of the Trust or
the Portfolio to which Forum's rights or claims relate in settlement of such
rights or claims, and not to the Trustees of the Trust or the interestholders of
the Portfolios.
58
<PAGE>
SECTION 6. MISCELLANEOUS
(a) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties hereto.
(b) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid, the remaining portion or
portions shall be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid.
(c) This Agreement may be executed by the parties hereto on any number
of counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
(d) Section headings in this Agreement are included for convenience
only and are not to be used to construe or interpret this Agreement.
(e) This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New York.
(f) Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
(g) The terms "vote of a majority of the outstanding voting interests,"
"interested person," "affiliated person" and "assignment" shall have the
meanings ascribed thereto in the Act to the terms "vote of a majority of the
outstanding voting securities," "interested person," "affiliated person" and
"assignment," respectively.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
SCHRODER CAPITAL FUNDS II
/s/ Alexandra Poe
----------------------
Alexandra Poe
Vice President
FORUM FINANCIAL SERVICES, INC.
/s/ John Y. Keffer
----------------------
John Y. Keffer
President
59
<PAGE>
SCHRODER CAPITAL FUNDS II
PLACEMENT AGENT AGREEMENT
APPENDIX A
Schroder International Bond Portfolio
60
EXHIBIT 12
SCHRODER INTERNATIONAL BOND PORTFOLIO
SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1997
FIXED INCOME INVESTMENTS - 95.1%
<TABLE>
<S> <C> <C>
CURRENCY FACE VALUE US$
- -------- ---- ---------
BELGIUM - 4.7%
BEF 24,000,000 Kingdom of Belgium, 9.00%, 3/28/03 $ 775,824
---------------------------
DENMARK - 4.5%
DKK 4,600,000 Kingdom of Denmark, 8.00%, 11/15/01 744,924
---------------------------
FRANCE - 4.0%
FRF 4,000,000 Government of France, 4.75%, 3/12/02 664,454
---------------------------
GERMANY - 37.4%
DEM 1,000,000 FNMA - Global Bond, 5.00%, 2/16/01 561,157
2,400,000 German Federal Government, 5.00%, 12/17/98 1,351,325
2,200,000 German Federal Government, 6.25%, 7/29/99 1,264,723
600,000 German Federal Government, 8.38%, 5/21/01 372,710
500,000 German Federal Government, 6.00%, 1/4/07 291,216
100,000 German Federal Government, 6.50%, 7/5/27 59,984
1,300,000 Province of Ontario, 6.25%, 1/13/04 765,096
1,300,000 Republic of Austria, 6.88%, 4/3/00 763,639
1,300,000 Republic of Finland, 6.88%, 4/3/01 746,129
---------------------------
---------------------------
6,175,979
---------------------------
ITALY - 4.5 %
ITL 1,170,000,000 Republic of Italy, 10.50%, 7/15/00 747,271
---------------------------
JAPAN - 10.9%
JPY 200,000,000 International Bank for Research & Development, 5.25%, 3/20/02 1,799,090
---------------------------
NETHERLANDS - 3.9%
NLG 800,000 Government of Netherlands, 7.50%, 11/15/99 417,199
400,000 Government of Netherlands, 8.75%, 9/15/01 227,469
---------------------------
644,668
---------------------------
SPAIN - 4.7%
ESP 105,000,000 Government of Spain, 8.40%, 4/30/01 765,556
---------------------------
SWEDEN - 4.2%
SEK 4,500,000 Kingdom of Sweden, 13.00%, 6/15/01 696,700
---------------------------
UNITED KINGDOM - 16.3%
GBP 550,000 Bayerische Landesbank, 6.88%, 6/7/02 904,903
600,000 International Bank for Research & Development, 7.00%, 6/7/02 995,967
50,000 United Kingdom Treasury, 7.25%, 3/30/98 82,274
400,000 United Kingdom Treasury, 8.00%, 6/10/03 701,544
---------------------------
2,684,688
---------------------------
TOTAL FIXED INCOME INVESTMENTS (COST $16,355,906) 15,699,154
---------------------------
</TABLE>
1
61
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
SCHEDULE OF INVESTMENTS (CONCLUDED)
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
FOREIGN CURRENCY - 0.0% VALUE US$
---------
CURRENCY FACE
- -------- ----
ITL 4,495,313 Italian Lira (cost $2,570) $ 2,542
---------------------------
PURCHASED PUT OPTION - 0.0%
JPY 9,000,000 Japanese Government Bonds 125 March 1998 (cost $19,614) 4,152
---------------------------
Total Investments - 95.1% (cost $16,378,090) 15,705,848
Other Assets Less Liabilities - 4.9% 809,554
---------------------------
Total Net Assets - 100.0% $ 16,515,402
===========================
</TABLE>
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
CONTRACTS TO SELL
<S> <C> <C> <C> <C> <C>
CONTRACT DATE CURRENCY UNITS US $ UNREALIZED GAIN (LOSS) US$
------------- -------- ----- ---- --------------------------
1/16/98 AUD 450,000 $ 325,935 $ 32,642
1/2/98-2/19/98 DEM 3,630,000 2,064,533 43,733
1/16/98 ESP 144,600,000 987,108 38,102
1/16/98-2/19/98 GBP 1,010,000 1,696,934 37,428
1/16/98-2/19/98 JPY 260,000,000 2,113,250 104,701
1/16/98 NLG 1,807,000 927,676 35,550
1/16/98 SEK 6,902,000 917,649 47,426
===========================
$ 339,582
===========================
</TABLE>
<TABLE>
CONTRACTS TO BUY
<S> <C> <C> <C> <C> <C>
CONTRACT DATE CURRENCY UNITS US $ UNREALIZED GAIN (LOSS) US$
------------- -------- ----- ---- --------------------------
1/16/98 AUD 450,000 $ 330,885 $ (37,593)
1/15/98-2/19/98 CAD 2,300,000 1,637,650 (29,210)
1/15/98-2/19/98 DEM 2,187,000 1,261,075 (43,109)
1/16/98 ESP 53,100,000 358,431 (9,938)
1/16/98-2/19/98 JPY 506,434,000 4,192,132 (281,463)
1/16/98 NLG 425,000 211,306 (1,481)
1/16/98 SEK 1,285,000 165,167 (3,151)
===========================
$ (405,945)
===========================
===========================
Net forward foreign currency contracts $ (66,363)
===========================
</TABLE>
- ---------------------------------------------
ABBREVIATIONS
AUD - Australian Dollar
BEF - Belgian Franc
DEM - German Deutsche Mark
DKK - Danish Krone
ESP - Spanish Peseta
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NLG - Dutch Guilder
SEK - Swedish Krona
The accompanying notes are an integral part of the financial statements.
2
62
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments (Note 2):
Investments at cost $ 16,378,090
Net unrealized appreciation (depreciation) (672,242)
----------------------
Total Investments at value 15,705,848
Cash 300,974
Receivable from investment adviser (Note 3) 6,549
Receivable for investments sold 1,288,887
Interest and other receivables 519,367
Organization costs, net of amortization (Note 2) 6,617
----------------------
Total Assets 17,828,242
----------------------
LIABILITIES:
Payable for shares of beneficial interest redeemed 1,202,750
Net payable for forward foreign currency contracts (Note 2) 66,363
Accrued expenses 43,727
----------------------
Total Liabilities 1,312,840
----------------------
Net Assets $ 16,515,402
======================
COMPONENTS OF NET ASSETS:
Investors' capital $ 17,267,942
Net unrealized appreciation (depreciation) on investments (752,540)
----------------------
Net Assets $ 16,515,402
======================
</TABLE>
The acompanying notes are an integral part of the financial statements.
3
63
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income $ 661,538
-----------------------
EXPENSES:
Investment advisory (Note 3) 53,529
Administration (Note 3) 10,706
Subadministration (Note 3) 25,000
Transfer agency (Note 3) 12,123
Custody 3,386
Accounting (Note 3) 62,000
Legal 3,635
Audit 33,452
Trustees' Fees 1,072
Amortization of organization costs (Note 2) 1,654
Miscellaneous 6,141
-----------------------
Total Expenses 212,698
Fees waived and expenses reimbursed (Note 6) (131,908)
-----------------------
Net Expenses 80,790
-----------------------
NET INVESTMENT INCOME (LOSS) 580,748
-----------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FORWARD FOREIGN
CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on investments sold (107,908)
Net realized gain (loss) on forward foreign currency contracts and
foreign currency transactions (443,900)
-----------------------
Net realized gain (loss) on investments, forward foreign
currency contracts and foreign currency transactions (551,808)
-----------------------
Net change in unrealized appreciation (depreciation) on investments (672,242)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts and foreign currency transactions (80,298)
-----------------------
Net change in unrealized appreciation (depreciation) on investments,
forward foreign currency contracts and foreign currency transactions (752,540)
-----------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, FORWARD FOREIGN
CURRENCY CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS (1,304,348)
-----------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (723,600)
=======================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
64
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
NET ASSETS, BEGINNING OF PERIOD $ 3,000,100
----------------------------
OPERATIONS:
Net investment income (loss) 580,748
Net realized gain (loss) on investments sold (551,808)
Net change in unrealized appreciation (depreciation) on investments (752,540)
----------------------------
Net increase (decrease) in net assets resulting from operations (723,600)
----------------------------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST:
Contributions 18,113,652
Withdrawals (3,874,750)
----------------------------
Net increase (decrease) in net assets from transactions
in investors' beneficial interest 14,238,902
----------------------------
Net increase (decrease) in net assets 13,515,302
----------------------------
NET ASSETS, END OF PERIOD $ 16,515,402
============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
65
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
<TABLE>
<S> <C>
Portfolio performance for the following period:
For the
Year Ended
December 31, 1997
------------------------
Ratio to Average Net Assets:
Expenses including reimbursement/waiver of fees 0.75%
Expenses excluding reimbursement/waiver of fees 1.99%
Net investment income including reimbursement/waiver of fees 5.42%
Portfolio Turnover Rate 112.04%
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
66
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Schroder Capital Funds II ("Schroder Core") was organized on December
27, 1996 as a Delaware business trust. Schroder Core, which is registered as an
open-end, management investment company under the Investment Company Act of 1940
(the "Act"), currently has one investment portfolio. Under the Trust Instrument,
Schroder Core is authorized to issue an unlimited number of interests without
par value. Interests in the Portfolio are sold in private placement transactions
without any sales or transaction charges to qualified investors, including
open-end, management investment companies. The Portfolio commenced operations on
December 31, 1996.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are prepared in accordance with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increase and decrease in net assets from
operations during the fiscal period. Actual results could differ from those
estimates.
The following represent significant accounting policies of the
Portfolio:
SECURITY VALUATION
Portfolio securities listed on recognized stock exchanges are valued at the last
reported sale price on the exchange on which the securities are principally
traded. Listed securities traded on recognized stock exchanges where last sale
prices are not available are valued at the last sale price on the proceeding
trading day or at closing mid-market prices. Securities traded in
over-the-counter markets are valued at the most recent reported mid-market
price. Short-term investments having a maturity of 60 days or less are valued at
amortized cost, which approximates market value. 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 Schroder Core's Board of
Trustees.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Interest
income, including amortization of discount or premium, is recorded as earned.
Identified cost of investments sold is used to determine realized gain and loss
for both financial statement and federal income tax purposes. Foreign interest
income amounts and realized capital gain and loss are converted to U.S. dollar
equivalents using foreign exchange rates in effect at the date of the
transactions.
Foreign currency amounts are translated into U.S. dollars at the mean
of the bid and asked prices of such currencies against U.S. dollars as follows:
(i) assets and liabilities at the rate of exchange at the end of the respective
period; and (ii) purchases and sales of securities and income and expenses at
the rate of exchange prevailing on the dates of such transactions. The portion
of the results of operations arising from changes in the exchange rates and the
portion due to fluctuations arising from changes in the market prices of
securities are not isolated. Such fluctuations are included with the net
realized and unrealized gain or loss on investments.
The Portfolio may purchase put options on securities to protect
its holdings in an underlying or related security against a substantial decline
in market value. Securities are considered related if their price movements
generally correlate with one another. The purchase of put options on securities
held in the Portfolio or related to such securities will enable the Portfolio to
preserve, at least partially, unrealized gains occuring prior to the purchase of
the option on a security without actually selling the security. In addition, the
Portfolio will continue to receive interest or dividend income on the security.
7
67
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Portfolio may enter into forward contracts to purchase or sell foreign
currencies to protect against the effect on the U.S. dollar value of the
underlying portfolio of possible adverse movements in foreign exchange rates.
Risks associated with such contracts include the movement in value of the
foreign currency relative to the U.S. dollar and the ability of the counterparty
to perform. Fluctuations in the value of such contracts are recorded daily as
unrealized gain or loss; realized gain or loss include net gain or loss on
contracts that have terminated by settlement or by the Portfolio entering into
offsetting commitments.
ORGANIZATIONAL COSTS
Cost incurred by the Portfolio in connection with its organization are
being amortized on a straight line basis over a five-year period.
NOTE 3. INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Schroder Capital Management International Inc. ("SCMI") is the investment
adviser to the Portfolio. Pursuant to an Investment Advisory Agreement, SCMI is
entitled to receive an annual fee, payable monthly, of 0.50% of the average
daily net assets of the Portfolio.
ADMINISTRATOR AND SUBADMINISTRATOR
The administrator of the Portfolio is Schroder Fund Advisors Inc.
("Schroder Advisors"). In addition, the Portfolio has entered into a
Subadministration Agreement with Forum Administrative Services, LLC ("Forum").
For its services, Schroder Advisors is entitled to receive compensation at an
annual rate, payable monthly, of 0.10% of the average daily net assets of the
Portfolio. For its services, Forum is entitled to receive compensation an annual
rate, payable monthly, of 0.075% of the average daily net assets of the
Portfolio. The minimum total subadministration fee is $25,000.
OTHER SERVICE PROVIDERS
Forum Financial Corp.(R) ("FFC") serves as the Portfolio's
interestholder recordkeeper and is entitled to compensation for those services
from Schroder Core with respect to the Portfolio in the amount of $12,000 per
year plus certain other fees and expenses. FFC also performs portfolio
accounting for the Portfolio and is entitled to compensation for those services
in the amount of $60,000 per year, plus certain amounts based upon the number
and types of portfolio transactions.
8
68
<PAGE>
SCHRODER INTERNATIONAL BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 4. PURCHASES AND SALES OF SECURITIES
The cost of securities purchased and the proceeds from sales of
securities (excluding short-term investments) for the year ended December 31,
1997 aggregated $29,100,085 and $12,276,672, respectively.
For federal income tax purposes, the tax basis of investment securities
owned as of December 31, 1997 was $16,382,853 and the net unrealized
depreciation of investment securities was $677,005. The aggregate gross
unrealized appreciation for all securities in which there was an excess of
market value over tax cost was $57,844, and the aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost over
market value was $734,849. .
NOTE 5. FEDERAL TAXES
The Portfolio is not required to pay federal income taxes on its net
investment income and net capital gain as it is treated as a partnership for
federal income tax purposes. All interest, dividends, gain and loss of the
Portfolio are deemed to have been "passed through" to the partners in proportion
to their holdings of the Portfolio regardless of whether such interest,
dividends or gain have been distributed by the Portfolio. Under the applicable
foreign tax law, a withholding tax may be imposed on interest and capital gains
at various rates.
NOTE 6. WAIVER OF FEES AND REIMBURSEMENT OF EXPENSES
SCMI and Schroder Advisors voluntarily have waived a portion of their
fees and have assumed certain expenses of the Portfolio so that its total
expenses would not exceed certain limitations. Forum and FFC may waive
voluntarily all or a portion of their fees, from time to time. For the year
ended December 31, 1997, fees waived and expenses reimbursed were as follows:
<TABLE>
<S> <C> <C>
Waived Reimbursed
- -------------------------------------------------------------------------------------------------
SCMI $53,529 $6,549
Schroder Advisors 10,706 -
Forum 25,000 -
FFC 36,124 -
</TABLE>
NOTE 7. BENEFICIAL INTEREST
As of the period ended December 31, 1997, there were three unaffiliated
shareholders, each of whom owns more than 10% of the Portfolio's interests,
holding in the aggregate in excess of 99% of the Portfolio's total interests.
NOTE 8. GEOGRAPHIC CONCENTRATION
The Portfolio has a relatively large concentration of portfolio securities
invested in companies domiciled in Germany. The Portfolio may be more
susceptible to political, social and economic events adversely affecting German
companies than portfolios not so concentrated.
9
69
<PAGE>
To the Trustees of Schroder Capital Funds II and the Investors of International
Bond Portfolio:
We have audited the accompanying statement of assets and liabilities
for the International Bond Portfolio (a separate portfolio of Schroder Capital
Funds II), including the schedule of investments, as of December 31, 1997, and
the related statement of operations, the statement of changes in net assets and
the financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosure in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the International Bond Portfolio as of December 31, 1997, the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
Boston, Massachusetts Coopers & Lybrand L.L.P.
February 23, 1998
10
70
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SCHRODER
INTERNATIONAL BOND PORTFOLIO ANNUAL REPORT DATED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<SERIES>
<NUMBER> 001
<NAME> SCHRODER INTERNATIONAL BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16,378,090
<INVESTMENTS-AT-VALUE> 15,705,848
<RECEIVABLES> 1,814,803
<ASSETS-OTHER> 307,591
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 17,828,242
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,312,840
<TOTAL-LIABILITIES> 1,312,840
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,267,942
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (752,540)
<NET-ASSETS> 16,515,402
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 661,538
<OTHER-INCOME> 0
<EXPENSES-NET> 80,790
<NET-INVESTMENT-INCOME> 580,748
<REALIZED-GAINS-CURRENT> (551,808)
<APPREC-INCREASE-CURRENT> (752,540)
<NET-CHANGE-FROM-OPS> (723,600)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,113,652
<NUMBER-OF-SHARES-REDEEMED> 3,874,750
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,515,302
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53,529
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 212,698
<AVERAGE-NET-ASSETS> 10,705,875
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
