MERRIMAC SERIES FUND
Semi-Annual Report
June 30, 1998
<PAGE>
Merrimac Series
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================
Cash Treasury
Series Series
--------------- --------------
<S> <C> <C>
Assets
Investment in corresponding Merrimac Portfolio, at value (Note 1) 140,687,644 $ 37,580,248
Deferred organization expense (Note 1) 11,937 9,437
--------------- --------------
Total assets 140,699,581 37,589,685
Liabilities
Distributions payable to shareholders 119,904 28,577
Accrued expenses 21,898 8,933
--------------- --------------
Total liabilities 141,802 37,510
--------------- --------------
Net Assets $ 140,557,779 $ 37,552,175
=============== ==============
Net Assets consist of
Paid in capital $ 140,557,903 $ 37,551,768
Accumulated net realized gain (loss) on investments (124) 407
--------------- --------------
Total net assets $ 140,557,779 $ 37,552,175
=============== ==============
Total Net Assets
Premium Class $ 100,000 --
=============== ==============
Institutional Class $ 140,457,779 $ 37,552,175
=============== ==============
Shares of Beneficial Interest Outstanding
Premium Class 100,000 --
=============== ==============
Institutional Class 140,457,903 37,551,768
=============== ==============
Net Asset Value, Maximum Offer and Redemption Price per Share $ 1.00 $ 1.00
=============== ==============
</TABLE>
Statement of Operations
For the Period June 25, 1998 (Commencement of Operations)
to June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================
Cash Treasury
Series Series
--------------- --------------
<S> <C> <C>
Investment Income (Note 1)
Interest income allocated from Portfolio $ 133,266 $ 33,383
--------------- --------------
Expenses
Expenses allocated from Portfolio 3,401 1,867
Accounting, transfer agency, and administration fees (Note 4) 234 63
Registration 2,220 588
Legal 512 164
Insurance 409 117
Printing 240 59
Trustees fees and expenses 170 47
Audit and tax return preparation fees 170 187
Amortization of organization expenses (Note 1) 63 63
Miscellaneous 85 70
--------------- --------------
Total expenses common to all classes 7,504 3,225
Shareholder servicing fee-Institutional Class 5,858 1,581
--------------- --------------
Total expenses 13,362 4,806
--------------- --------------
Net Investment Income 119,904 28,577
Net Realized Gain (Loss) on Investments from Portfolio (124) 407
--------------- --------------
Net Increase in Net Assets from Operations $ 119,780 $ 28,984
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Merrimac Series
Statement of Changes in Net Assets
For the Period June 25, 1998 (Commencement of Operations)
to June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================================
Cash Treasury
Series Series
--------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 119,904 $ 28,577
Net realized gain (loss) from Portfolio (124) 407
--------------- --------------
Net increase in net assets from operations 119,780 28,984
--------------- --------------
Dividends Declared from Net Investment Income
Premium Class (88) --
Institutional Class (119,816) (28,577)
--------------- --------------
Total dividends declared (119,904) (28,577)
--------------- --------------
Fund Share Transactions (Note 7)
Proceeds from shares sold 146,243,656 40,804,246
Payment for shares redeemed (5,785,753) (3,252,478)
--------------- --------------
Net increase in net assets derived from share transactions 140,457,903 37,551,768
--------------- --------------
Net increase in net assets 140,457,779 37,552,175
Net Assets
Beginning of period 100,000 --
--------------- --------------
End of period $ 140,557,779 $ 37,552,175
=============== ==============
</TABLE>
Financial Highlights
For the Period June 25, 1998 (Commencement of Operations)
to June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================================
Selected data for a share of beneficial interest outstanding throughout the period is presented below:
Treasury
Cash Series Series
-------------------------------------------- --------------------
Premium Class Institutional Class Institutional Class
---------------- ------------------- --------------------
<S> <C> <C> <C>
Net asset value, beginning of period $1.000 $ 1.000 $ 1.000
------- ------- --------
Income from operations
Net investment income 0.001 0.001 0.001
------- ------ --------
Less distributions
From net investment income (0.001) (0.001) (0.001)
------- ------- --------
Net asset value, end of period $1.000 $ 1.000 $ 1.000
======= ======= ========
Total Return (1) 5.36% 5.11% 4.52%
Annualized Ratios to Average Net Assets/
Supplemental Data
Net expenses 0.32% 0.57% 0.91%
Net investment income 5.36% 5.11% 4.52%
Net expenses, before waiver 0.36% 0.61% NA
Net assets, end of period (000s omitted) $100 $140,458 $ 37,580
</TABLE>
(1) Total return is calculated assuming a purchase at the net asset value on
the first day and a sale at the net asset value on the last day of each
period reported. Dividends and distributions are assumed reinvested at the
net asset value on the payable date. Total return is computed on an
annualized basis.
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Merrimac Series
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies:
The Merrimac Series (the "Trust") was organized as a Delaware business
trust and is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified, management investment company. The
Merrimac Cash Series (the "Cash Series") and the Merrimac Treasury Series
(the "Treasury Series"), collectively, the "Funds" are separate diversified
investment portfolios or series of the Trust. The Funds consist of three
classes of shares, the Premium Class, the Institutional Class and the
Investment Class. The Funds commenced operation on June 25, 1998.
The Cash Series and the Treasury Series each seek to achieve their
investment objective by investing all of their investable assets in the
Merrimac Cash Portfolio (the "Cash Portfolio") and the Merrimac Treasury
Portfolio (the "Treasury Portfolio"), respectively. The Cash Portfolio and
the Treasury Portfolio, each an open-end investment management company and
a series of the Merrimac Master Portfolio, are hereinafter referred to
singly as a "Portfolio," and collectively as the "Portfolios". Each Fund
has the same investment objective as the Portfolio into which it invests.
The performance of each Fund is directly affected by the performance of the
Portfolio into which it invests. The Portfolios seeks to achieve a high
level of current income, consistent with the preservation of capital and
liquidity. The financial statements of the Portfolios are included
elsewhere in this report and should be read in conjunction with the Funds'
financial statements. At June 30, 1998, the investment by the Cash Series
and the Treasury Series represent ownership of proportionate interests of
19.51% and 100%, respectively, of the corresponding portfolios.
The policies of the Cash Series and the Treasury Series are designed to
maintain a stable net asset value of $1.00 per share. The Funds have
adopted certain investment, valuation, dividend and distribution policies
which conform to general industry practice, to enable them to do so.
However, there is no assurance that the Funds will be able to maintain a
stable net asset value.
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. The preparation
of financial statements in accordance with generally accepted accounting
principles ("GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. Investment Security Valuations
The Funds record investments in the Portfolios at value. Valuation of
securities by the Portfolios is discussed in Note 1 of the Portfolios'
Notes to Financial Statements, which are included elsewhere in this report.
B. Securities Transactions and Income
The Portfolios record securities transactions as of the trade date.
Interest income, including the accretion of discount or the amortization of
premium, is recognized when earned. Gains or losses on sales of securities
are calculated on the identified cost basis. Each Fund's net investment
income consists of its pro rata share of the net investment income of its
corresponding Portfolio, less all expenses of the Fund determined in
accordance with GAAP.
C. Federal Income Taxes
Each Fund intends to qualify annually as a regulated investment company
under Subchapter M of the Internal Revenue Code, and thus not be subject to
income taxes. Each Fund must distribute all of its taxable income for its
fiscal year and meet certain other requirements. Accordingly, no provision
for federal income taxes is required.
D. Deferred Organization Expense
Costs incurred by the Funds in connection with their organization and
initial registration are being amortized on a straight-line basis over a
five year period beginning at the commencement of operations of each Fund.
3
<PAGE>
Merrimac Series
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
E. Expense Allocation
Expenses directly attributable to a fund are charged to that fund. Expenses
not directly attributable to a specific fund are allocated, based on
relative net assets, to each of the funds.
(2) Dividends and Distributions to Shareholders
Dividends on the shares of the Funds are declared each business day to
shareholders of record at 2:00 PM (New York time) on that day, and paid or
reinvested as of the last business day of the month. Distributions of net
realized gains, if any, may be declared annually. Dividends and
distributions are determined in accordance with federal income tax
regulations, which may differ from GAAP.
(3) Shareholder Servicing and Distribution Plans
The Trust has adopted Shareholder Servicing Plans with respect to the
Institutional Class and Investment Class under which certain service
organizations may be compensated for providing shareholder accounting and
other administrative services for their clients. The Institutional Class
and Investment Class will pay an annual fee of 0.25% of the value of the
assets that an organization services on behalf of its clients. Under a
Distribution Plan, the Investment Class will also pay an annual
distribution fee of 0.25% of the value of the assets that an organization
invests in the funds on behalf of its clients. The Investment Class of each
Fund and Premium Class of the Treasury Series have not yet commenced
operations.
(4) Management Fee and Affiliated Transactions
The Cash Portfolio and Treasury Portfolio retain Investors Bank & Trust
Company ("Investors Bank") as investment adviser. Aeltus Investment
Management, Inc. ("Aeltus") serves as sub-adviser to the Treasury Portfolio
and The Bank of New York ("BNY") serves as the sub-adviser to the Cash
Portfolio. The Funds pay no direct fees for such services, but indirectly
bear their pro rata share of the compensation paid by the Portfolios. See
Note 2 of the Portfolios' Notes to Financial Statements which are included
elsewhere in this report.
Investors Bank serves as administrator, custodian and transfer agent to the
Trust. IBT Fund Services (Canada) Inc., a subsidiary of Investors Bank,
provides fund accounting services to the Funds. For these services,
Investors Bank and its subsidiary are paid a monthly fee at an annual rate
of 0.01% of the average daily net assets of each Fund.
Certain trustees and officers of the Trust are directors or officers of
Investors Bank. The Funds do not pay compensation to the trustees or
officers who are affiliated with the investment adviser.
(5) Investment Transactions
The Cash Series' investments in and withdrawals from the Cash Portfolio for
the period from June 25, 1998 (commencement of operations) to June 30, 1998
aggregated $146,343,656 and $5,785,753 respectively. The Treasury Series'
investments in and withdrawals from the Treasury Portfolio for the period
from June 25, 1998 (commencement of operations) to June 30, 1998 aggregated
$40,804,246 and $3,255,921 respectively.
4
<PAGE>
Merrimac Series
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(6) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest having a par value of $0.001 per share.
Transactions in Fund shares at $1.00 per share for each class were as
follows:
<TABLE>
<CAPTION>
Cash Series Treasury Series
Premium Class Institutional Class Institutional Class
-------------------- --------------------- ----------------------
June 25, 1998 June 25, 1998 June 25, 1998
(Commencement of (Commencement of (Commencement of
Operations) to Operations) to Operations) to
June 30, 1998 June 30, 1998 June 30, 1998
-------------------- --------------------- ---------------------
<S> <C> <C>
Proceeds from shares sold .......... -- 146,243,656 40,804,246
Proceeds from shares reinvested .... -- -- --
Payment for shares redeemed ........ -- (5,785,753) (3,252,478)
----------- ------------- -------------
Net increase in shares ............. -- 140,457,903 37,551,768
=========== ============= =============
</TABLE>
At June 30, 1998, Investors Bank as agent for its clients, was the record
holder of all outstanding Institutional Class shares of each Fund. All
outstanding Cash Series Premium Class shares, which represent the initial
shares sold by the Trust, were held by the Trust's distributor. If any of
the initial shares are redeemed, the amount paid by the Fund on any
redemption of the initial shares will by reduced by the pro-rata portion of
any unamortized organizational expenses of the Fund.
(7) Subsequent Event
On July 30, 1998, the Board of Trustees of the Merrimac Master Portfolio
voted to recommend to shareholders of the Cash Portfolio that Allmerica
Asset Management, Inc. ("Allmerica") replace BNY as sub-adviser. The
decision was based on a mutual agreement between BNY and Investors Bank
that BNY would not serves as sub-adviser beyond the initial term of its
Sub-Adviser Agreement. If shareholder approval is obtained at the scheduled
August 28, 1998 shareholder meeting, Allmerica will assume sub-adviser
responsibility on September 1, 1998.
5
<PAGE>
Merrimac Cash Portfolio
Schedule of Investments
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Security Yield to Par Value
Maturity Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Variable Rate Notes * - 38.0%
Asset Backed Securities Investment Trust 5.65% 7/15/98 $ 50,000,000 $ 50,000,000
Australia & New Zealand Bank 5.59% 7/15/98 70,000,000 69,997,736
Bank One Wisconsin 5.53% 7/07/98 54,000,000 53,986,826
Bankers Trust 5.68% 7/01/98 25,000,000 24,997,059
IBM Credit Corporation 5.71% 7/01/98 30,000,000 29,999,702
Morgan Stanley Dean Witter 5.63% 7/15/98 20,000,000 20,000,000
Pittsburgh National Corporation 5.80% 7/01/98 25,000,000 24,996,146
-------------
Total Variable Rate Notes 273,977,469
-------------
Commercial Paper - 27.7%
Amsterdam Funding Corporation 5.56% 7/14/98 25,000,000 24,949,806
Archer Daniels Midland Company 5.50% 7/13/98 20,000,000 19,963,334
Compass Securitization 5.64% 7/15/98 30,000,000 29,934,200
Ford Motor Credit Corporation 5.49% 7/14/98 50,000,000 49,900,875
National Rural Utilities 5.49% 8/06/98 50,000,000 49,725,500
Sheffield Receivables Corporation 5.56% 7/10/98 25,000,000 24,965,250
-------------
Total Commercial Paper 199,438,965
-------------
Yankee Certificates of Deposit - 11.1%
Commerzbank 5.55% 2/11/99 50,000,000 49,985,214
Credit Agricole 5.66% 2/26/99 30,000,000 29,990,548
-------------
Total Yankee Certificates of Deposit 79,975,762
-------------
Time Deposits - 9.7%
Banco Bilbao Vizcaya 6.00% 7/01/98 35,000,000 35,000,000
Norddeutsche Landesbank 6.00% 7/01/98 35,000,000 35,000,000
-------------
Total Time Deposits 70,000,000
-------------
Certificates of Deposit - 5.5%
Bayerische Landesbank 5.60% 7/01/98 10,000,000 10,000,000
Societe Generale 5.55% 2/09/99 30,000,000 29,991,208
-------------
Total Certificates of Deposit 39,991,208
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Merrimac Cash Portfolio
Schedule of Investments
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Security Yield to Par Value
Maturity Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase Agreements - 7.3%
Goldman Sachs Repurchase Agreement dated 6/30/98, $ 17,301,000 $ 17,301,000
due 7/01/98, with a maturity value of $17,303,835 and an
effective yield of 5.90%, collateralized by U.S. Government
Agency Obligations with rates ranging from 6.00% to 7.00% and
maturities ranging from 3/15/27 to 2/20/28, with an aggregate
market value of $17,647,020.
Merrill Lynch Repurchase Agreement, dated 6/30/98, 35,000,000 35,000,000
due 7/01/98, with a maturity value of $35,005,931 and an
effective yield of 6.10%, collateralized by U.S. Government
Agency Obligations with maturity dates ranging from 10/01/27
to 04/01/28, and with an aggregate market value of $35,701,566.
--------------
Total Repurchase Agreements 52,301,000
--------------
TOTAL INVESTMENTS - 99.3%
(Cost $715,684,404) 715,684,404
Other Assets and Liabilities (net) - 0.7% 5,300,173
--------------
TOTAL NET ASSETS - 100.0% $ 720,984,577
==============
</TABLE>
Notes to the Schedule of Investments:
* Variable rate securities - maturity dates on these types of securities
reflect the next interest rate reset date or, when applicable, the final
maturity date. Yield to maturity for these securities is determined on the
date of the most recent interest rate change.
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Merrimac Treasury Portfolio
Schedule of Investments
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Yield to Par Value
Security Maturity Maturity Value (Note 1A)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations - 78.4%
U.S. Treasury Bill 4.74% 7/09/98 2,500,000 $ 2,497,367
U.S. Treasury Bill 4.99% 10/01/98 3,000,000 2,961,743
U.S. Treasury Note 5.33% 8/15/98 6,000,000 6,003,273
U.S. Treasury Note 5.15 - 5.33% 8/31/98 8,000,000 8,004,323
U.S. Treasury Note 5.20% 9/30/98 4,000,000 4,007,176
U.S. Treasury Note 5.37 - 5.38% 11/15/98 6,000,000 6,002,243
------------
Total U.S. Treasury Obligations 29,476,125
------------
U.S. Government Agency Obligations - 20.5%
Federal Home Loan Bank 5.63% 3/12/99 3,000,000 3,000,000
Federal Home Loan Mortgage Corporation 5.55% 7/01/98 4,720,000 4,720,000
------------
Total U.S. Government Agency Obligations 7,720,000
------------
TOTAL INVESTMENTS - 98.9%
(Cost $37,196,125) 37,196,125
Other Assets and Liabilities (net) - 1.1% 384,123
------------
NET ASSETS - 100.0% $ 37,580,248
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Merrimac Master Portfolio
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Cash Portfolio Treasury Portfolio
-------------- ------------------
<S> <C> <C>
Assets
Investments, at value (Note 1) $ 715,684,404 $ 37,196,125
Cash 211 150
Interest receivable 5,388,282 436,214
Deferred organization expense (Note 1) 41,152 5,261
Prepaid assets 13,178 1,441
-------------- -------------
Total assets 721,127,227 37,639,191
-------------- -------------
Liabilities
Management fee payable (Note 2) 97,690 5,902
Other accrued expenses 44,960 53,041
-------------- -------------
Total liabilities 142,650 58,943
-------------- -------------
Net Assets Applicable to Investors' Beneficial Interests $ 720,984,577 $ 37,580,248
============== =============
</TABLE>
Statement of Operations
For the Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Cash Portfolio Treasury Portfolio
-------------- ------------------
<S> <C> <C>
Income
Interest $ 33,532,322 $ 1,209,372
--------------- -------------
Expenses
Management fee (Note 2) 1,006,293 38,806
Insurance 25,297 2,107
Trustee fees and expenses 23,557 2,212
Audit 11,042 8,509
Transaction fees 9,908 3,535
Legal 7,787 3,563
Amortization of organization expense (Note 1) 6,050 1,000
Miscellaneous 9,616 1,124
-------------- -------------
Total expenses 1,099,550 60,856
Less: Management fee waived (Note 2) (362,621) --
-------------- -------------
Net expenses 736,929 60,856
-------------- -------------
Net Investment Income 32,795,393 1,148,516
Net Realized Loss on Investments (638) (446)
-------------- -------------
Net Increase in Net Assets from Operations $ 32,794,755 $ 1,148,070
============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Merrimac Master Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
====================================================================================================================================
Cash Portfolio Treasury Portfolio
------------------------------------- -------------------------------------------
Six Months Six Months April 2, 1997
Ended Ended (Commencement
June 30, 1998 Year Ended June 30, 1998 of Operations) to
(Unaudited) December 31, 1997 (Unaudited) December 31, 1997
------------- ----------------- ------------- ----------------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 32,795,393 $ 74,983,944 $ 1,148,516 $ 2,361,756
Net realized loss on investments (638) -- (446) (2,590)
-------------- --------------- ------------ --------------
Net increase in net assets from operations 32,794,755 74,983,944 1,148,070 2,359,166
-------------- --------------- ------------ --------------
Transactions in Investors'
Beneficial Interest
Contributions 1,001,408,146 2,193,287,654 115,875,701 255,362,805
Withdrawals (1,698,065,917) (1,889,734,150) 153,359,869) (183,805,625)
-------------- --------------- ------------ --------------
Net increase (decrease) from investors'
transactions (696,657,771) 303,553,504 (37,484,168) 71,557,180
-------------- --------------- ------------ --------------
Net Increase (Decrease) in Net Assets (663,863,016) 378,537,448 (36,336,098) 73,916,346
Net Assets
Beginning of period 1,384,847,593 1,006,310,145 73,916,346 --
-------------- --------------- ------------ --------------
End of period $ 720,984,577 $ 1,384,847,593 $ 37,580,248 $ 73,916,346
============== =============== ============ ==============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
====================================================================================================================================
Cash Portfolio Treasury Portfolio
---------------------------------------------------- ----------------------------------
Six Months November 12, 1996 Six Months April 2, 1997
Ended (Commencement Ended (Commencement
June 30, 1998 Year Ended of Operations) to June 30, 1998 of Operations) to
(Unaudited) December 31, 1997 December 31, 1966 (Unaudited) December 31, 1997
------------- ----------------- ----------------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Annualized Ratios to Average Net Assets/
Supplemental Data
Net expenses 0.12% 0.16% 0.12% 0.27% 0.29%
Net investment income 5.54% 5.51% 5.45% 5.03% 5.06%
Net expenses, before waiver 0.19% 0.19% 0.21% NA NA
Net assets, end of period (000s omitted) $720,985 $1,384,848 $1,006,310 $37,580 $73,916
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Merrimac Master Portfolio
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies:
The Merrimac Master Portfolio (the "Portfolio Trust") was organized as
a common law trust under the laws of the State of New York and is
registered under the Investment Company Act of 1940, as amended ("1940
Act"), as an open-end, diversified, management investment company with
its principal offices in the Cayman Islands. The Merrimac Cash
Portfolio (the "Cash Portfolio") and the Merrimac Treasury Portfolio
(the "Treasury Portfolio" and collectively, the "Portfolios") are
separate diversified investment series of the Portfolio Trust.
The following is a summary of significant accounting policies followed
by the Portfolio Trust in the preparation of its financial statements.
The preparation of financial statements in accordance with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
A. Investment Security Valuations
Portfolio securities are valued using the amortized cost method, which
involves initially valuing an investment at its cost and thereafter
assuming a constant amortization to maturity of any premium or
discount. This method results in a value approximating market value.
Each Portfolio's use of amortized cost is subject to compliance with
certain conditions specified under Rule 2a-7 of the 1940 Act.
B. Securities Transactions and Income
Interest income consists of interest accrued and discount earned
(including both the original issue and market discount) less premium
amortized on the investments of the Portfolios, accrued ratably to the
date of maturity. Purchases, maturities and sales of money market
instruments are accounted for on the date of transaction. Expenses of
the portfolio are accrued daily. All investment income, expenses, and
realized capital gains and losses of the Portfolios are allocated pro
rata to their investors.
C. Federal Income Taxes
Each Portfolio is considered a partnership under the U.S. Internal
Revenue Code. Accordingly, no provision for federal income taxes is
necessary. Each Portfolio also intends to conduct its operations such
that each investor will be able to qualify as a regulated investment
company.
D. Repurchase Agreements
It is the policy of the Cash Portfolio to require the custodian bank to
take possession of all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Cash Portfolio to monitor, on a daily basis, the
market value of the repurchase agreement's underlying investments to
ensure the existence of a proper level of collateral. The Treasury
Portfolio does not invest in repurchase agreements.
E. Deferred Organization Expense
Costs incurred by each Portfolio in connection with its organization
and initial registration are being amortized, on a straight-line basis
over a five year period beginning at the commencement of operations of
that portfolio.
11
<PAGE>
(2) Management Fee and Affiliated Transactions
The Portfolios retain Investors Bank & Trust Company ("Investors Bank") as
investment adviser to continuously review and monitor the Portfolios'
investment program. Aeltus Investment Management, Inc. ("Aeltus") serves as
sub-adviser to the Treasury Portfolio and The Bank of New York ("BNY")
serves as the sub-adviser to the Cash Portfolio. For its services to the
Portfolios, each sub-adviser is paid a monthly fee by Investors Bank
computed at an annual rate of 0.08% of the average daily assets of the
Portfolio. The Portfolio does not pay a fee directly to either sub-adviser
for such services.
Investors Bank serves as custodian for the Portfolio Trust. Investor's Fund
Services (Ireland) Limited, a subsidiary of Investors Bank, serves as
administrator. IBT Fund Services (Canada) Inc., a subsidiary of Investors
Bank, serves as fund accounting and transfer agent. For these services,
Investors Bank and its subsidiaries are paid a monthly fee at an annual
rate of 0.17% of the average daily net assets of the Portfolios. Investors
Bank and BNY voluntarily collectively reduced their fees by $362,621 for
the Cash Portfolio during the six months ended June 30, 1998.
Certain trustees and officers of the Portfolio Trust are directors or
officers of Investors Bank. The Fund does not pay compensation to its
trustees or officers who are affiliated with the investment adviser.
(3) Investment Transactions
Purchases and combined maturities and sales of money market instruments
aggregated $23,044,355,503 and $23,727,469,833 respectively for the Cash
Portfolio for the period ended June 30, 1998 and $1,124,703,931 and
$1,136,096,919, respectively for the Treasury Portfolio for the period
ended June 30, 1998.
(4) Subsequent Event
On July 30, 1998, the Board of Trustees of the Portfolio Trust voted to
recommend to shareholders of the Cash Portfolio that Allmerica Asset
Management, Inc. ("Allmerica") replace BNY as sub-adviser. The decision was
based on a mutual agreement between BNY and Investors Bank that BNY would
not serves as sub-adviser beyond the initial term of its Sub-Adviser
Agreement. If shareholder approval is obtained at the scheduled August 28,
1998 shareholder meeting, Allmerica will assume sub-adviser responsibility
on September 1, 1998.
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