MERRIMAC SERIES
200 Clarendon Street
Boston, Massachusetts 02116
1-888-MERRMAC
The Merrimac Series (the "Trust") is an open-end management investment company
consisting of the following four separate series of shares (each, a "Fund" and
collectively, the "Funds"):
Merrimac Cash Series
Merrimac Treasury Series
Merrimac Treasury Plus Series
Merrimac Short-Term Asset Reserve Series
INVESTMENT OBJECTIVE. The investment objective of each Fund is to achieve a
high level of current income consistent with preserving principal and
liquidity. The Merrimac Cash Series, the Merrimac Treasury Series and the
Merrimac Treasury Plus Series are money market funds, while the Merrimac
Short-Term Asset Reserve Series is a short term fixed income fund.
CLASSES OF SHARES. Each of the Funds offers three classes of shares: Premium
Class, Institutional Class and Investment Class. The minimum initial investment
for Premium Class shares of each Fund is $10 million. The minimum initial
investment for Institutional Class and Investment Class shares of each Fund is
$10,000. See "Purchases and Redemptions" for more information about each class
of shares.
This Prospectus sets forth basic information that a prospective investor should
know before investing in any of the Funds and should be read and retained for
future reference. A Statement of Additional Information (the "SAI"), dated
January 14, 1999, has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus. A copy of
the SAI may be obtained free of charge by calling the toll-free number above.
Investment in the Funds is neither insured nor guaranteed by the U.S.
Government, and is not a deposit or obligation of, or guaranteed or endorsed
by, Investors Bank & Trust Company. Further, investment in the Funds is not
insured by the Federal Deposit Insurance Corporation or any other government
agency, and involves investment risks, including possible loss of principal
amount invested. The Merrimac Cash Series, the Merrimac Treasury Series and the
Merrimac Treasury Plus Series attempt to maintain a stable net asset value of
$1.00 per share; however, there can be no assurance that either Fund will be
able to do so. The Merrimac Short-Term Asset Reserve Series is not a money
market fund and will not seek to maintain a stable net asset value.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
January 14, 1999 As Supplemented January 21, 1999
Funds Distributor, Inc. (the "Distributor")
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<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Page
Summary...........................................................3
Expense Information...............................................6
The Funds and the Portfolios......................................9
Investment Objectives and Policies................................9
Description of Permitted Investments and Related Risks............12
Who Should Invest.................................................21
Additional Information Concerning Investment Structure............21
Management of the Funds and the Portfolios........................22
Valuation of Shares...............................................25
Purchases and Redemptions.........................................26
Dividends, Distributions and Taxes................................28
Performance Information...........................................30
</TABLE>
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SUMMARY
The following is a brief summary of the proposed terms for the Funds. It is
qualified in its entirety by the detailed information appearing elsewhere in
this Prospectus.
INVESTMENT OBJECTIVE: The Funds will seek to achieve a high level of current
income consistent with preserving principal and liquidity.
MINIMUM INITIAL INVESTMENT: $10 million for the Premium Class, $10,000 for the
Institutional Class and $10,000 for the Investment Class.
NET ASSET VALUE: The Merrimac Cash Series (the "Cash Series"), the Merrimac
Treasury Series (the "Treasury Series") and the Merrimac Treasury Plus Series
(the "Treasury Plus Series") will seek to maintain a $1.00 per share net asset
value; however, there can be no assurance that any Fund will be able to do so.
The net asset value of the Merrimac Short-Term Asset Reserve Series (the "STAR
Series") will not remain constant but will fluctuate, as described below.
MASTER-FEEDER STRUCTURE: Traditional mutual funds directly acquire and manage
their own portfolio securities. As part of a master-feeder structure, the Funds
seek to achieve their investment objective by investing all of their investable
assets in their corresponding Portfolio. The Cash Series, the Treasury Series
and the Treasury Plus Series each seek to achieve their investment objective by
investing all of their investable assets in the Merrimac Cash Portfolio (the
"Cash Portfolio"), the Merrimac Treasury Portfolio (the "Treasury Portfolio")
and the Merrimac Treasury Plus Portfolio (the "Treasury Plus Portfolio"),
respectively. The STAR Series seeks to achieve its objective by investing all
of its investable assets in the Standish Short-Term Asset Reserve Portfolio
(the "STAR Portfolio"). The Cash Portfolio, the Treasury Portfolio, the
Treasury Plus Portfolio and the STAR Portfolio are hereinafter referred to
singly as a "Portfolio," and collectively as the "Portfolios." Each Fund's
investment experience will correspond directly with the investment experience
of its corresponding Portfolio.
INVESTMENT PORTFOLIOS AND POLICIES: The Cash Portfolio, the Treasury Portfolio
and the Treasury Plus Portfolio each invest in high quality money market
instruments which represent minimal credit risk. Currency exposure is
restricted to U.S. dollars. When it is anticipated that short-term interest
rates will decrease, the average maturity of the Cash Portfolio, the Treasury
Portfolio and the Treasury Plus Portfolio may be increased to lock-in
prevailing rates prior to an anticipated decrease in rates. Conversely, when it
is anticipated that short-term interest rates will increase, the average
maturity of the Cash Portfolio, the Treasury Portfolio and the Treasury Plus
Portfolio may be reduced. The Portfolios will maintain a dollar-weighted
average maturity of 90 days or less and will not invest in securities with
remaining maturities of more than 397 calendar days.
The STAR Portfolio invests in a broad range of investment grade money market
instruments and short-term fixed income securities. The STAR Portfolio may also
invest in tax-exempt securities and prime commercial paper of U.S. and foreign
companies, and may enter into reverse repurchase agreements. The STAR Portfolio
limits its investments in preferred stock and tax exempt securities to 10% of
its total assets.
INVESTMENT ADVISERS AND SUB-ADVISERS: Investors Bank & Trust Company
("Investors Bank") acts as Investment Adviser to the Cash Portfolio, the
Treasury Portfolio and the Treasury Plus Portfolio. Investors Bank's business
address is 200 Clarendon Street, Boston, Massachusetts 02116. As Investment
Adviser, Investors Bank continuously reviews and supervises the investment
program for the Cash
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Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio. Allmerica
Asset Management, Inc. ("AAM") acts as Investment Sub-Adviser for the Cash
Portfolio and M&I Investment Management Corp. ("M&I") acts as Investment
Sub-Adviser for the Treasury Portfolio and the Treasury Plus Portfolio. AAM's
business address is 440 Lincoln Street, Worcester, Massachusetts 01653. M&I's
business address is 1000 North Water Street, Milwaukee, Wisconsin 53202. As
Investment Sub-Adviser, AAM and M&I each select investments and place all
orders for the purchase and sale of their respective Portfolio's investments.
Standish, Ayer & Wood, Inc. ("Standish") acts as Investment Adviser to the STAR
Portfolio. Standish's business address is One Financial Center, Boston,
Massachusetts 02111. Standish continuously reviews and supervises the
investment program for the STAR Portfolio, selects investments and places all
orders for the purchase and sale of the STAR Portfolio's investments.
PURCHASE ORDERS AND RELATED DIVIDEND TIMING: Purchase orders received by 4:00
p.m. Eastern Time (ET) for the Cash Series and the Treasury Plus Series, 2:00
p.m. (ET) for the Treasury Series, and by the close of trading on the New York
Stock Exchange ("NYSE"), for the STAR Series, will be effected on that Business
Day (as defined below) at the net asset value computed next following receipt
of the order, if cleared funds are received that Business Day. Purchase orders
received after 4:00 p.m. (ET) for the Cash Series and the Treasury Plus Series,
after 2:00 p.m. (ET) for the Treasury Series, and after the close of trading on
the NYSE, for the STAR Series will be effected on the next Business Day if
cleared funds are received before the close of business on the next Business
Day. Investors in the Cash Series, the Treasury Series and the Treasury Plus
Series will receive the dividend on the Business Day their purchase is
effected. Investors in the STAR Series will receive the dividend on the next
Business Day after their purchase is effected. See "Purchases and
Redemptions."
TIME OF NET ASSET VALUE CALCULATION: As of 4:00 p.m. (ET) for the Cash Series
and the Treasury Plus Series, as of 2:00 p.m. (ET) for the Treasury Series, and
as of the close of trading on the NYSE, for the STAR Series on a Business Day.
The Funds are open on any day on which both the NYSE and the New York Federal
Reserve Bank are open (a "Business Day"), except that the STAR Fund is open on
any day on which the NYSE is open.
REDEMPTION METHODS AND TIMING: Redemptions can be effected by telephone, wire
and mail (no check writing privileges). Redemption requests received by 4:00
p.m. (ET) for the Cash Series and the Treasury Plus Series, by 2:00 p.m. (ET)
for the Treasury Series, and by the close of trading on the NYSE, for the STAR
Series on a Business Day, will become effective the same Business Day.
Investors in the Cash Series, the Treasury Series and the Treasury Plus Series
will not receive a dividend for the Business Day their redemption becomes
effective. Investors in the STAR Series will receive a dividend for the
Business Day their redemption becomes effective. Requests received after
4:00 p.m. (ET) for the Cash Series and the Treasury Plus Series, after 2:00
p.m. (ET) for the Treasury Series, and after the close of trading on the NYSE,
for the STAR Series, will be treated as received on the following Business Day.
For shareholders liquidating their account, dividends accrued to the date of
redemption shall be payable with redemption proceeds.
CUSTODIAN: Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116.
COUNSEL: Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts
02109 is counsel to the Cash Series, Cash Portfolio, Treasury Series, Treasury
Portfolio, Treasury Plus Series, Treasury Plus Portfolio and STAR Series. Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 is counsel to the
STAR Portfolio.
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AUDITORS: Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116
serve as auditors for the Cash Series, Cash Portfolio, Treasury Series,
Treasury Portfolio, Treasury Plus Series, Treasury Plus Portfolio and STAR
Series. PricewaterhouseCoopers LLP serve as auditors for the STAR Portfolio.
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EXPENSE INFORMATION
The following tables summarize shareholder transaction and annual operating
expenses for the Premium, Institutional and Investment Class shares of the
Funds and for the Portfolios. It is intended to assist investors in
understanding the various costs and expenses that a shareholder of a Fund will
bear, either directly or indirectly. Each Fund invests all of its investable
assets in its corresponding Portfolio. For more information on costs and
expenses, see "Organization and Management of the Funds and the Portfolios."
PREMIUM CLASS
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CASH TREASURY TREASURY STAR
SERIES SERIES PLUS SERIES
SERIES
Sales Charge Imposed on Purchases None None None None
Sales Charge Imposed on
Reinvested Dividends None None None None
Deferred Sales Charge Imposed on
Redemptions None None None None
Annual Fund (and Allocated
Portfolio)
Operating Expenses (as a
percentage of average net assets)
Management Fee(1) 0.17% 0.17% 0.17% 0.25%
12b-1 fees None None None None
Other Expenses (after expense
reimbursement)(2) 0.08% 0.23% 0.08% 0.11%
Total Fund Operating
Expenses (3) 0.25% 0.40% 0.25% 0.36%
----- ----- ----- -----
</TABLE>
(1) The Management Fee of the Cash Series, the Treasury Series and
the Treasury Plus Series includes fees payable to the relevant
Investment Sub-Adviser.
(2) The amounts set forth for "Other Expenses" include fees for
legal and accounting services, printing and regulatory filings
and are based on estimates for the current fiscal year.
Investors Bank has voluntarily agreed to limit Total Fund
Operating Expenses (excluding litigation, indemnification, taxes
and other extraordinary expenses) of the STAR Series to 0.36% of
average daily net assets. In the absence of this agreement,
Other Expenses and Total Fund Operating Expenses are estimated
to be equal, on an annual basis, to 0.20% and 0.45%,
respectively, of the Star Series' average daily net assets. This
agreement is voluntary and temporary and may be revised by
Investors Bank at any time although it has no current intention
to do so.
(3) Total Fund Operating Expenses include estimated expenses for a
Fund and actual expenses of its corresponding Portfolio.
Example: A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) with or without
redemption at the end of each period:
<TABLE>
<CAPTION>
<S> <C> <C>
1 YEAR 3 YEARS
Cash Series $3 $8
Treasury Series $4 $13
Treasury Plus Series $3 $8
STAR Series $4 $12
</TABLE>
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<TABLE>
<CAPTION>
INSTITUTIONAL CLASS
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C> <C>
CASH TREASURY TREASURY STAR
SERIES SERIES PLUS SERIES
SERIES
Sales Charge Imposed on Purchases None None None None
Sales Charge Imposed on
Reinvested Dividends None None None None
Deferred Sales Charge Imposed on
Redemptions None None None None
Annual Fund (and Allocated
Portfolio)
Operating Expenses
(as a percentage of average net
assets)
Management Fee(1) 0.17% 0.17% 0.17% 0.25%
12b-1 fees None None None None
Other Expenses (after expense
reimbursement)(2) 0.33% 0.48% 0.33% 0.36%
Total Fund Operating Expenses (3) 0.50% 0.65% 0.50% 0.61%
----- ----- ----- -----
</TABLE>
(1) The Management Fee of the Cash Series, the Treasury Series and
the Treasury Plus Series includes fees payable to the relevant
Investment Sub-Adviser.
(2) The amounts set forth for "Other Expenses" include fees for
legal and accounting services, printing and regulatory filings
and are based on estimates for the current fiscal year.
Investors Bank has voluntarily agreed to limit Total Fund
Operating Expenses (excluding litigation, indemnification, taxes
and other extraordinary expenses) of the STAR Series to 0.61% of
average daily net assets. In the absence of this agreement,
Other Expenses and Total Fund Operating Expenses are estimated
to be equal, on an annual basis, to 0.45% and 0.70%, respectively,
of the Star Series' average daily net assets. This agreement is
voluntary and temporary and may be revised by Investors Bank at
any time although it has no current intention to do so.
(3) Total Fund Operating Expenses include estimated expenses for a
Fund and actual expenses of its corresponding Portfolio.
Example: A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) with or without
redemption at the end of each period:
<TABLE>
<CAPTION>
<S> <C> <C>
1 YEAR 3 YEARS
Cash Series $5 $16
Treasury Series $7 $21
Treasury Plus Series $5 $16
STAR Series $6 $20
</TABLE>
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<TABLE>
<CAPTION>
INVESTMENT CLASS
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C> <C>
CASH TREASURY TREASURY STAR
SERIES SERIES PLUS SERIES
SERIES
Sales Charge Imposed on Purchases None None None None
Sales Charge Imposed on
Reinvested Dividends None None None None
Deferred Sales Charge Imposed on
Redemptions None None None None
Annual Fund (and Allocated
Portfolio)
Operating Expenses (as a
percentage of average net assets)
Management Fee(1) 0.17% 0.17% 0.17% 0.25%
12b-1 fees 0.25% 0.25% 0.25% 0.25%
Other Expenses (after expense
reimbursement)(2) 0.33% 0.48% 0.08% 0.36%
Total Fund Operating Expenses (3) 0.75% 0.90% 0.50% 0.86%
----- ----- ----- -----
</TABLE>
(1) The Management Fee of the Cash Series, the Treasury Series and
the Treasury Plus Series includes fees payable to the relevant
Investment Sub-Adviser.
(2) The amounts set forth for "Other Expenses" include fees for
legal and accounting services, printing and regulatory filings
and are based on estimates for the current fiscal year.
Investors Bank has voluntarily agreed to limit Total Fund
Operating Expenses (excluding litigation, indemnification, taxes
and other extraordinary expenses) of the STAR Series to 0.86% of
average daily net assets. In the absence of this agreement,
Other Expenses and Total Fund Operating Expenses are estimated
to be equal, on an annual basis, to 0.45% and 0.95%,
respectively, of the Star Series' average daily net assets. This
agreement is voluntary and temporary and may be revised by
Investors Bank at any time although it has no current intention
to do so.
(3) Total Fund Operating Expenses include estimated expenses for a
Fund and actual expenses of its corresponding Portfolio.
The payment of a Rule 12b-1 fee by the Investment Class of each
Fund may result in a long-term shareholder paying more than the
economic equivalent of the maximum initial sales charge
permitted under the Conduct Rules of the National Association of
Securities Dealers, Inc.
Example: A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) with or without
redemption at the end of each period:
<TABLE>
<CAPTION>
<S> <C> <C>
1 YEAR 3 YEARS
Cash Series $8 $24
Treasury Series $9 $29
Treasury Plus Series $5 $16
STAR Series $9 $27
</TABLE>
The Examples are based on assumed performance levels and should not be
considered a representation of past or future expenses of the Funds. Actual
expenses may be greater or less than those shown.
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THE FUNDS AND THE PORTFOLIOS
Each Fund is a diversified series of the Trust, an open-end, management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust was organized under the laws of the state
of Delaware on March 31, 1998 and is currently authorized to issue shares in
four series: the Cash Series, the Treasury Series, the Treasury Plus Series and
the STAR Series. Shareholders of each Fund are entitled to one vote for each
share and to the appropriate fractional vote for each fractional share of their
respective Fund. There is no cumulative voting. Shares have no preemptive or
conversion rights. Shares are fully paid and nonassessable by the Trust. The
Trust does not intend to hold meetings of shareholders, except as required
under the 1940 Act.
The Cash Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio are
each diversified series of the Merrimac Master Portfolio (the "Portfolio
Trust"), an open-end, management investment company registered under the 1940
Act. The Portfolio Trust is a common law trust organized under the laws of the
state of New York on October 30, 1996 and is currently authorized to issue
interests in three series: the Cash Portfolio, the Treasury Portfolio and the
Treasury Plus Portfolio.
The STAR Portfolio is a diversified series of Standish, Ayer & Wood Master
Portfolio (the "Standish Portfolio Trust"), an open-end, management investment
company registered under the 1940 Act. The Standish Portfolio Trust is a common
law trust organized under New York law on January 18, 1996 and is authorized to
issue interests in seven series, including the STAR Portfolio. Interests in the
Portfolios have no preemptive or conversion rights, and are fully paid and non-
assessable by each Portfolio. Neither the Portfolio Trust nor the Standish
Portfolio Trust will hold meetings of holders of such interests, except as
required under the 1940 Act.
The Board of Trustees of each of the Trust, the Portfolio Trust and the
Standish Portfolio Trust is generally responsible for management of the
business and affairs of the Trust, the Portfolio Trust and the Standish
Portfolio Trust, respectively. Trustees formulate general policies, approve
contracts and authorize officers to carry out the decisions of such Board. See
the SAI for more information concerning the management of each of the Trust,
the Portfolio Trust and the Standish Portfolio Trust.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund is to obtain a high level of current
income consistent with the preservation of principal and liquidity. There is no
assurance that the Funds will achieve their investment objectives. Each Fund's
investment objective and investment policies (other than the policies
identified under "Investment Restrictions" below) are not fundamental and may
be changed at any time by the Board of Trustees of the Trust (the "Board of
Trustees" or the "Trustees").
Because each Fund invests all of its investable assets in its corresponding
Portfolio, the investment objective and characteristics of each Fund correspond
directly to those of its Portfolio. See "Additional Information Concerning
Investment Structure" for more information. The Cash Portfolio, the Treasury
Portfolio and the Treasury Plus Portfolio seek to achieve the same objectives
as their corresponding Funds by investing in high quality U.S. dollar
denominated money market instruments. The STAR Portfolio seeks to achieve the
same objective as the STAR Series by investing in a broad range of investment
grade money market instruments and short-term fixed income securities.
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MONEY MARKET FUNDS
The Cash Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio will
each operate as a "money market mutual fund" and all investments will qualify
as "eligible securities" within the meaning of Rule 2a-7 under the 1940 Act.
Consistent with Rule 2a-7, neither the Cash Portfolio, the Treasury Portfolio
nor the Treasury Plus Portfolio will purchase securities of any issuer (except
securities issued or guaranteed by the United States Government, and with
respect to the Cash Portfolio and the Treasury Plus Portfolio, securities
issued or guaranteed by agencies or instrumentalities of the United States
Government and repurchase agreements involving such securities) if as a result
more than 5% of the total assets of either the Cash Portfolio, the Treasury
Portfolio or the Treasury Plus Portfolio would be invested in the securities of
such issuer or the Cash Portfolio, the Treasury Portfolio or the Treasury Plus
Portfolio would own more than 10% of the outstanding voting securities of such
issuer.
Although the policies of the Cash Series, the Treasury Series, the Treasury
Plus Series, the Cash Portfolio, the Treasury Portfolio and the Treasury Plus
Portfolio are designed to maintain a stable net asset value of $1.00 per share,
all money market instruments can change in value when interest rates or an
issuer's creditworthiness changes, or if an issuer or guarantor of a security
fails to pay interest or principal when due. If these changes in value were
substantial, the Cash Series, the Treasury Series or the Treasury Plus Series'
net asset value could deviate from $1.00.
CASH PORTFOLIO. The Cash Portfolio may invest in U.S. Treasury bills, notes and
bonds, and other instruments issued or guaranteed by the U.S. Government or its
agencies or instrumentalities ("U.S. Government Securities"); securities of
U.S. and foreign banks or thrift organizations (such as bankers' acceptances,
time deposits and certificates of deposit); corporate debt obligations,
including commercial paper, notes and bonds and other money market instruments;
asset-backed securities; and variable rate obligations (defined as a security
whose coupon rate resets at least every six months). The Cash Portfolio also
may invest in repurchase agreements that are collateralized by the securities
listed above with no restrictions on the maturity of obligations
collateralizing such repurchase agreements and may engage in securities
lending.
TREASURY PORTFOLIO. The Treasury Portfolio will only invest in direct
obligations of the U.S. Treasury. Under Federal law, the income derived from
obligations issued by the U.S. Treasury is exempt from state income taxes. All
states that tax personal income permit mutual funds to pass through this tax
exemption to shareholders, assuming appropriate state imposed threshold limits
have been met. To maximize tax-effective yield for shareholders, under normal
circumstances, the Treasury Portfolio will only invest in obligations that
qualify for the exemption from state taxation. The Treasury Portfolio also may
engage in securities lending.
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TREASURY PLUS PORTFOLIO. The Treasury Plus Portfolio will invest, under normal
circumstances, at least 65% of its assets in direct obligations of the U.S.
Treasury and may invest the remaining 35% of its assets in U.S. Government
Securities and in repurchase agreements that are collateralized by U.S.
Government Securities with no restrictions on the maturity of obligations
collateralizing such repurchase agreements and may engage in securities
lending.
STAR PORTFOLIO. The STAR Portfolio invests in a broad range of investment grade
money market instruments and short-term fixed-income securities. The STAR
Portfolio may invest in all types of fixed-income securities, including bonds,
notes (including structured or hybrid notes), mortgage-backed securities,
asset-backed securities, shares of real estate investment trusts ("REITs"),
convertible securities, Eurodollar and Yankee Dollar instruments, preferred
tocks (including convertible preferred stock), and money market instruments
(such as negotiable certificates of deposit, non-negotiable fixed time
deposits, bankers' acceptances and prime commercial paper). These fixed income
securities may be issued by the U.S. Government, its agencies, authorities,
instrumentalities or sponsored enterprises, U.S. and foreign banks, U.S. and
(solely with respect to prime commercial paper) foreign companies. The STAR
Portfolio limits its investments in each of tax-exempt securities and preferred
stocks to 10% of its total assets. The STAR Portfolio may purchase securities
that pay interest on a fixed, variable, floating, inverse floating, contingent,
in-kind or deferred basis. The STAR Portfolio may enter into repurchase
agreements, reverse repurchase agreements and forward dollar roll transactions,
may purchase zero coupon and deferred payment securities, and may buy
securities on a when-issued or delayed delivery basis. The STAR Portfolio may
also purchase shares of other investment companies and real estate investment
trusts. The net asset value of the STAR Series will not remain constant but
will fluctuate with the value of the assets of the STAR Portfolio.
In selecting investments for the STAR Portfolio, Standish's primary investment
management and research focus is at the security and industry/sector level.
Standish manages the STAR Portfolio by selecting undervalued investments,
rather than by varying the average maturity of the securities to reflect
interest rate forecasts. Fundamental credit and sector valuation techniques are
used to evaluate what are considered to be less efficient markets and sectors
of the fixed income marketplace in an attempt to select securities with the
potential for the highest return.
Although the Cash Portfolio, the Treasury Portfolio, the Treasury Plus
Portfolio and the Star Portfolio invest in U.S. Government Securities, neither
an investment in any of the Funds nor a Fund's investment in its corresponding
Portfolio is insured or guaranteed by the U.S. Government.
MATURITY
CASH PORTFOLIO, TREASURY PORTFOLIO AND TREASURY PLUS PORTFOLIO. The Cash
Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio will maintain
a dollar-weighted average maturity of 90 days or less and will not invest in
securities with remaining maturities of more than 397 calendar days (as
determined in accordance with Rule 2a-7 under the 1940 Act.) The Cash
Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio may invest in
variable or floating rate securities. Such securities may bear interest at
rates subject to periodic adjustment or may provide for periodic recovery of
principal on demand.
STAR PORTFOLIO. Securities held by the STAR Portfolio will generally have an
effective or remaining maturity of 3.25 years or less from the date of
settlement, except that up to 10% of the STAR Portfolio's total assets may be
represented by securities with effective maturities or redemption dates, put
dates or coupon dates of between 3.25 and five years. The maturity limitation
does not apply to U.S. Treasury notes or bonds with maturities of longer than
3.25 years, which may be purchased by the STAR Portfolio in conjunction with
the sale of note or bond futures contracts or with certain equivalent options
positions which are designed to hedge the notes or bonds in such a way as to
create a synthetic short-term instrument. The STAR Portfolio's average dollar-
weighted effective portfolio maturity will not exceed 18 months.
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QUALITY
CASH PORTFOLIO. The Cash Portfolio intends to incur limited credit risk by only
purchasing securities, in addition to U.S. Government Securities, that are
rated in the highest or second highest rating categories (i.e., Prime-1 or
Prime-2 by Moody's Investors Service, Inc. ("Moody's"), A-1 or A-2 by Standard
& Poor's Ratings Group ("Standard & Poor's"), Fitch-1 or Fitch 2 by Fitch's
IBCA Investors Service ("Fitch"), Duff-1 or Duff-2 by Duff and Phelps ("Duff"),
for short-term debt obligations by at least two nationally recognized
statistical rating organizations ("NRSROs"). As a matter of operating policy,
however, the Cash Portfolio will only invest in securities, exclusive of U.S.
Government Securities, that are rated in the highest rating category for
short-term obligations by at least two NRSROs. Investments in high quality,
short-term instruments may, in many circumstances, result in a lower yield than
would be available from investments in instruments with a lower quality or a
longer term. See "Description of Permitted Investments and Related Risks" in
this Prospectus for more information regarding each Portfolio's investment
policies. See also Appendix A to the SAI for a description of NRSRO ratings.
STAR PORTFOLIO. The STAR Portfolio invests primarily in high grade securities,
which are those securities that are rated within the top three rating
categories (i.e., Aaa, Aa, A or P-1 by Moody's or AAA, AA, A, A-1 or Duff-1 by
Standard & Poor's, Duff, Fitch, or, if unrated, determined by Standish to be of
comparable credit quality. The STAR Portfolio may also invest up to 15% of its
total assets in medium grade obligations rated Baa or P-2 by Moody's or BBB,
A-2 or Duff-2 by Standard & Poor's, Duff, Fitch, or, if unrated, determined by
Standish to be of comparable credit quality. The average dollar-weighted credit
quality of the STAR Portfolio's portfolio securities is expected to be at least
Aa according to Moody's or AA according to Standard & Poor's, Duff or Fitch. If
a security is rated differently by two or more rating agencies, Standish uses
the highest rating to compute the STAR Portfolio's credit quality and also to
determine a security's rating category. If the rating of a security is
downgraded below the minimum rating required for the STAR Portfolio, Standish
will determine whether to retain that security in the portfolio.
Securities rated in the lowest category of investment grade (Baa or P-2 by
Moody's or BBB, A-2 or Duff-2 by Standard & Poor's, Duff or Fitch) are
generally considered medium grade obligations and have some speculative
characteristics. Adverse changes in economic conditions or other circumstances
are more likely to weaken the medium grade issuer's capability to pay interest
and repay principal than is the case for high grade securities.
DESCRIPTION OF PERMITTED INVESTMENTS AND RELATED RISKS
GENERAL
Investment in the Funds involve certain risks. Each Portfolio invests in money
market instruments and the STAR Portfolio invests in high and medium grade
fixed income securities. Such securities can change in value when interest
rates or an issuer's creditworthiness changes, or if an issuer or guarantor of
a security fails to pay interest or principal when due. The risks involved with
such securities include interest rate risk, default risk and call and extension
risk.
INTEREST RATE RISK. When interest rates decline, the market value of money
market instruments and fixed income securities tends to increase. Conversely,
when interest rates increase, market values tend to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
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DEFAULT/CREDIT RISK. Investments in money market instruments and fixed income
securities are subject to the risk that the issuer of the security could
default on its obligations causing a Portfolio to sustain losses on such
investments. A default could impact both interest and principal payments.
CALL AND EXTENSION RISK. Fixed income securities may be subject to both call
risk and extension risk. Call risk exists when the issuer may exercise a right
to pay principal on an obligation earlier than scheduled which would cause cash
flows to be returned earlier than expected. This typically results when
interest rates have declined and the STAR Portfolio could suffer from having to
reinvest in lower yielding securities. Extension risk exists when the issuer
may exercise a right to pay principal on an obligation later than scheduled
which would cause cash flows to be returned later than expected. This typically
results when interest rates have increased and the STAR Portfolio could suffer
from the inability to invest in higher yielding securities.
YEAR 2000. Like other mutual funds, governmental and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by the Investors Bank, AAM, M&I, Standish and other
service providers do not properly process and calculate date-related
information from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Each of the above entities is taking steps that it believes are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that it uses and to obtain reasonable assurances that comparable steps
are being taken by the Funds' other major service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact to the Funds.
PERMITTED INVESTMENTS AND RELATED RISKS
The following paragraphs include descriptions of the specific risks that are
associated with the Portfolios' purchase of a particular type of security or
the utilization of a specific investment technique.
U.S. GOVERNMENT SECURITIES. Each Portfolio, other than the Treasury Portfolio,
may invest in securities that are issued or guaranteed by an agency or
instrumentality of the U.S. Government established under the authority of an
act of Congress. Not all U.S. Government Securities are backed by the full
faith and credit of the United States. For example, securities issued by the
Federal Farm Credit Bank or by the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S. Treasury under
certain circumstances. Securities issued by the Federal Home Loan Bank are
supported only by the credit of the agency. There is no guarantee that the U.S.
Government will support these types of securities, and therefore they involve
more risk than "full faith and credit" government securities.
BANKERS' ACCEPTANCES. The Cash Portfolio and the STAR Portfolio may invest in
bankers' acceptances which are bills of exchange or time drafts drawn on and
accepted by a commercial bank. They are used by corporations to finance the
shipment and storage of goods and to furnish dollar exchange. Maturities are
generally six months or less.
TIME DEPOSITS. The Cash Portfolio and the STAR Portfolio may invest in time
deposits ("TDs"), which are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, a TD earns a
specified rate of interest over a definite period of time; however it cannot be
traded in the secondary market.
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CERTIFICATES OF DEPOSIT. The Cash Portfolio and the STAR Portfolio also may
invest in certificates of deposit ("CDs"), which are negotiable interest
bearing instruments with a specific maturity. CDs are issued by banks and
thrift institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity.
COMMERCIAL PAPER. The Cash Portfolio and the STAR Portfolio may invest in
commercial paper, which is the term used to designate unsecured short-term
promissory notes issued by corporations and other entities. The Cash Portfolio
and the STAR Portfolio may invest in commercial paper with maturities which
vary from a few days to nine months. The Cash Portfolio and the STAR Portfolio
may also purchase U.S. dollar-denominated commercial paper of a foreign issuer
rated in the highest or second highest rating categories by at least two
NRSROs. The STAR Portfolio may purchase U.S. dollar denominated commercial
paper of U.S. and foreign issuers rated A-2 by Moody's or P-2 or Duff-2 by
Standard & Poor's, Duff or Fitch.
CORPORATE DEBT OBLIGATIONS. Subject to their respective credit quality and
maturity limitations, the Cash Portfolio and the STAR Portfolio may invest in
corporate bonds, including obligations of industrial, utility, banking and
other financial issuers. Corporate bonds are subject to the risk of an issuer's
inability to meet principal and interest payments and may also be subject to
price volatility due to such factors as market interest rates, market
perception of the creditworthiness of the issuer and general market liquidity.
ASSET-BACKED SECURITIES. The Cash Portfolio and the STAR Portfolio may invest
in asset-backed securities, which consist of securities secured by company
receivables, home equity loans, truck and auto loans, leases, credit card
receivables and other securities backed by other types of receivables or other
assets. Credit support for asset-backed securities may be based on the
underlying assets and/or provided through credit enhancements such as letters
of credit, insurance bonds, limited issuer guarantees, senior-subordinated
structures and over-collateralization. Asset-backed securities are normally
traded over-the-counter and typically have a short-intermediate maturity
structure depending on the paydown characteristics of the underlying financial
assets which are passed through to the security holder. Asset-backed securities
may be subject to prepayment risk, particularly in a period of declining
interest rates. Prepayments, which occur when unscheduled payments are made on
the underlying debt instruments, may shorten the effective maturities of these
securities and may lower their total returns. Asset-backed securities generally
do not have the benefit of a security interest in collateral that is comparable
to mortgage assets and there is the possibility that recoveries on repossessed
collateral may not be available to support payments on these securities. There
is no limit on the extent to which the Cash and STAR Portfolios may invest in
asset-backed securities; however, the Cash Portfolio will only invest in
asset-backed securities that carry a rating in the highest category from at
least two NRSROs.
MORTGAGE-BACKED SECURITIES. The STAR Portfolio may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and
the Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed
securities represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by real property.
Mortgagors can generally prepay interest or principal on their mortgages
whenever they choose. Therefore, mortgage-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of principal prepayments on the underlying loans. This can
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result in significantly greater price and yield volatility than is the case
with traditional fixed income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair the STAR
Portfolio's ability to reinvest the returns of principal at comparable yields.
Conversely, in a rising interest rate environment, a declining prepayment rate
will extend the average life of many mortgage-backed securities, increase the
STAR Portfolio's exposure to rising interest rates and prevent the STAR
Portfolio from taking advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S. Government,
which means that the U.S. Government guarantees that the interest and principal
will be paid when due. FNMA securities and FHLMC securities are not backed by
the full faith and credit of the U.S. Government; however, these enterprises
have the ability to obtain financing from the U.S. Treasury. See the SAI for
additional descriptions of GNMA, FNMA and FHLMC certificates.
Multiple class securities include collateralized mortgage obligations ("CMOs")
and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled distribution date. In most cases,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code"), and invests in
certain mortgages principally secured by interests in real property and other
permitted investments. The STAR Portfolio does not intend to purchase residual
interests in REMICs.
CONVERTIBLE SECURITIES. The STAR Portfolio may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. The STAR
Portfolio's investments in preferred stock are limited to no more than 10% of
its total assets. Convertible debt securities and preferred stock acquired by
the STAR Portfolio entitle the STAR Portfolio to exchange such instruments for
common stock of the issuer at a predetermined rate. Convertible securities are
subject both to the credit and interest rate risks associated with debt
obligations and to the stock market risk associated with equity securities.
INVERSE FLOATING RATE SECURITIES. The STAR Portfolio may invest in inverse
floating rate securities. the interest on which 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. The higher the degree of leverage of an
inverse floater, the greater the volatility of its market value.
ZERO COUPON AND DEFERRED PAYMENT SECURITIES. The STAR Portfolio may invest in
zero coupon and deferred payment securities. Zero coupon securities are
securities sold at a discount to par value and on which interest payments are
not made during the life of the security. Upon maturity, the holder is entitled
to receive the par value of the security. The STAR Portfolio is required to
accrue income with respect to these securities prior to the receipt of cash
payments. Because the STAR Series will distribute its share of this accrued
income to shareholders, to the extent that the STAR Series' shareholders and
shareholders of other mutual funds that invest in the STAR Portfolio elect to
receive dividends in cash rather than reinvesting such dividends in additional
shares, the STAR Portfolio will have fewer assets with which to purchase income
producing securities. Deferred payment securities are securities that remain
zero coupon securities until a predetermined date, at which time the stated
coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be
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subject to greater fluctuation in value and may have less liquidity in the
event of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods. The Treasury Portfolio and the
Treasury Plus Portfolio may invest in zero coupon treasury securities.
STRUCTURED OR HYBRID NOTES. The STAR Portfolio may invest in structured or
hybrid notes. The distinguishing feature of a structured or hybrid note is that
the amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities
or interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the STAR Portfolio to gain exposure to the benchmark security while
fixing the maximum loss that it may experience in the event that the security
does not perform as expected. Depending on the terms of the note, the Portfolio
may forego all or part of the interest and principal that would be payable on a
comparable conventional note; the STAR Portfolio's loss cannot exceed this
foregone interest and/or principal. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark security.
EURODOLLAR AND YANKEE DOLLAR INVESTMENTS. The Cash Portfolio and the STAR
Portfolio may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds of foreign corporate and government issuers that pay
interest and principal in U.S. dollars held in banks outside the United States,
primarily in Europe. Yankee Dollar instruments are U.S. dollar denominated
bonds typically issued in the U.S. by foreign governments and their agencies
and foreign banks and corporations. The Portfolios may invest in Eurodollar
Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee
Certificates of Deposit ("Yankee CDs"). ECDs are U.S. dollar-denominated
certificates of deposit issued by foreign branches of domestic banks; ETDs are
U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or in a
foreign bank; and Yankee CDs are U.S. dollar-denominated certificates of
deposit issued by a U.S. branch of a foreign bank and held in the U.S. These
investments involve risks that are different from investments in securities
issued by U.S. issuers, including potential unfavorable political and economic
developments, foreign withholding or other taxes, seizure of foreign deposits,
currency controls, interest limitations or other governmental restrictions
which might affect payment of principal or interest. In addition, issuers of
Eurodollar instruments are not subject to the same regulations as are domestic
banks.
TAX-EXEMPT SECURITIES. The STAR Portfolio is managed without regard to
potential tax consequences. If Standish believes that tax-exempt securities
will provide competitive returns, the STAR Portfolio may invest up to 10% of
its total assets in tax-exempt securities. The STAR Series' distributions of
its share of any interest earned by the STAR Portfolio from these investments
will be taxable.
OTHER INVESTMENT COMPANIES. Each Portfolio may invest up to 10% of its total
assets in shares of investment companies and up to 5% of its total assets in
any one investment company as long as the investment does not represent more
than 3% of the total voting stock of the acquired investment company.
Investments in the securities of other investment companies may involve
duplication of advisory fees and other expenses.
REAL ESTATE INVESTMENT TRUSTS. The STAR Portfolio may invest in Real Estate
Investment Trusts ("REITs") which are pooled investment vehicles that invest in
real estate or real estate loans or interests. Investing in REITs involves
risks similar to those associated with investing in equity securities of small
capitalization companies. REITs are dependent upon management skills, are not
diversified, and are subject to risks of project financing, default by
borrowers, self-liquidation, and the possibility of failing to qualify for the
exemption from taxation under Subchapter M of the Code.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. Each Portfolio may invest in
when-issued and delayed delivery securities, which are securities purchased for
delivery beyond the normal settlement date at a stated price and yield, thereby
involving the risk that the yield obtained will be less then that available in
the market at delivery. The purchase of securities on a when-issued or delayed
delivery basis has the effect of leveraging. When such a security is purchased,
the Custodian will set aside cash or liquid securities to satisfy the purchase
commitment unless the relevant Portfolio has entered into an offsetting
agreement to sell the securities. These segregated securities will be valued at
market, and additional cash or securities will be segregated if necessary so
that the market value of the account will continue to satisfy the purchase
commitment. Such Portfolios generally will not pay for such securities or earn
interest on them until received. Commitments to purchase when-issued securities
will not, under normal market conditions, exceed 25% of the Cash, Treasury or
Treasury Plus Portfolios' total assets or 10% of the STAR Portfolio's total
assets, and a commitment will not exceed 90 days. Such Portfolios will only
purchase when-issued and delayed delivery securities for the purpose of
acquiring portfolio securities and not for speculative purposes. However, such
Portfolios may sell these securities or dispose of the commitment before the
settlement date if it is deemed advisable as a matter of investment strategy.
The market value of when-issued or delayed delivery securities when they are
delivered may be less than the amount such Portfolios paid for them.
VARIABLE AND FLOATING RATE INSTRUMENTS. Certain of the obligations purchased by
each Portfolio may carry variable or floating rates of interest and may include
variable amount master demand notes. A floating rate security provides for the
automatic adjustment of its interest rate whenever a specified interest rate
changes. A variable rate security provides for the automatic establishment of a
new interest rate on set dates. Variable and floating rate instruments may
include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. There may be no active secondary market with respect to a
particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to such
Portfolios will approximate their par value. Further, some of the demand
instruments purchased by such Portfolios derive their liquidity from the
ability of the holder to demand repayment from the issuer or from a third party
providing credit support. The creditworthiness of issuers of variable and
floating rate instruments and their ability to repay principal and interest
will be continuously monitored by such Portfolio's investment adviser or
sub-adviser.
REPURCHASE AGREEMENTS. Each Portfolio, other than the Treasury Portfolio, may
enter into repurchase agreements, which are agreements by which a person
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. In substance, a
repurchase agreement is a loan by the applicable Portfolio collateralized with
securities. Such lending Portfolio's Custodian or its agent will hold the
security as collateral for the repurchase agreement. All repurchase
transactions must be collateralized initially at a value at least equal to 102%
of the repurchase price and counterparties are required to deliver additional
collateral in the event the market value of the collateral falls below 100%.
Such Portfolios bear the risk of loss in the event the other party defaults on
its obligations and a Portfolio is delayed in or prevented from disposing of
the collateral securities or if a Portfolio realizes a loss on the sale of the
collateral securities. Such Portfolios will enter into repurchase agreements
with financial institutions deemed to present minimal risk of bankruptcy during
the term of the agreement based on guidelines established and periodically
reviewed by the Trustees of the Portfolio Trust. The Cash Portfolio and the
Treasury Plus Portfolio will not invest more than 10% of their net assets in
repurchase agreements maturing in more than seven days. The STAR Portfolio may
invest up to 25% of its net assets in repurchase agreements. The repurchase
transactions entered into by the Treasury Plus Portfolio must be collateralized
by U.S. Treasury Securities or U.S. Government Securities.
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REVERSE REPURCHASE AGREEMENTS. Each Portfolio may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, such Portfolios would sell the securities to financial institutions
such as banks and broker-dealers and agree to repurchase them at a mutually
agreed-upon date and price. Such Portfolios will enter into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions and to provide cash to satisfy redemption requests. At the time a
Portfolio enters into a reverse repurchase agreement, it would place in a
segregated custodial account, assets such as cash or liquid securities,
consistent with a Portfolio's investment restrictions and having a value equal
to the repurchase price (including accrued interest), and would subsequently
monitor the account to ensure that such equivalent value was maintained.
Reverse repurchase agreements involve the risk that the counterparty may
default at a time when the market value of securities sold by a Portfolio have
increased in value. Reverse repurchase agreements are considered by the SEC to
be borrowings by a Portfolio under the 1940 Act.
FORWARD ROLL TRANSACTIONS. To seek to enhance current income, the STAR
Portfolio may invest up to 10% of its net assets in forward roll transactions
involving mortgage-backed securities. In a forward roll transaction, the STAR
Portfolio sells a mortgage-backed security to a financial institution, such as
a bank or broker-dealer, and simultaneously agrees to repurchase a similar
security from the institution at a later date at an agreed-upon price. The
mortgage-backed securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the
period between the sale and repurchase, the Portfolio will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments, such as repurchase agreements
or other short-term securities, and the income from these investments, together
with any additional fee income received on the sale and the amount gained by
repurchasing the securities in the future at a lower price, will generate
income and gain for the Portfolio which is intended to exceed the yield on the
securities sold. Forward roll transactions involve the risk that the market
value of the securities sold by the Portfolio may decline below the repurchase
price of those securities. At the time that a Portfolio enters into a forward
roll transaction, it will place cash or liquid assets in a segregated account
that is marked to market daily having a value equal to the repurchase price
(including accrued interest).
LEVERAGE. The use of forward roll transactions and reverse repurchase
agreements involves leverage. Leverage allows any investment gains made with
the additional monies received (in excess of the costs of the forward roll
transaction or reverse repurchase agreement) to increase the net asset value of
a Portfolio faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to a Portfolio, the net asset value of the Portfolio
would fall faster than would otherwise be the case.
RESTRICTED AND ILLIQUID SECURITIES. Each Portfolio may invest up to 10% of its
net assets (15% of net assets with respect to the STAR Portfolio) in illiquid
securities. Illiquid securities are those that are not readily marketable,
repurchase agreements maturing in more than seven days, time deposits with a
notice or demand period of more than seven days and certain restricted
securities. Based upon continuing review of the trading markets for a specific
restricted security, the security may be determined to be eligible for resale
to qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933 and, therefore, to be liquid. Also, certain illiquid securities may
be determined to be liquid if they are found to satisfy certain relevant
liquidity requirements. The Board of Trustees of the Portfolio Trust and the
Standish Portfolio Trust have adopted guidelines and delegated to AAM, M&I or
Standish, as applicable, the daily function of determining and monitoring the
liquidity
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of portfolio securities, including restricted and illiquid securities. Each
Portfolio's Board of Trustees, however, retains oversight and is ultimately
responsible for such determinations. The purchase price and subsequent
valuation of illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
SECURITIES LENDING. Each Portfolio may lend up to 33 1/3% of its portfolio of
securities pursuant to agreements requiring that the loan be continuously
secured by cash or equivalent collateral or by a letter of credit or bank
guarantee in favor of the Portfolio at least equal at all times to 100% of the
market value plus accrued interest on the securities lent. The Portfolio will
continue to receive interest on the securities lent while simultaneously
seeking to earn interest on the investment of cash collateral. Collateral is
marked to market daily. There may be risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. However, loans will only be made to borrowers
deemed to be of good standing under guidelines established by the Trustees. In
addition, the Portfolio will bear the risk of any decline in value of
securities acquired with cash collateral. Loans are subject to termination by
the Portfolio or the borrower at any time and are, therefore, not considered to
be illiquid investments.
SHORT-TERM TRADING. Although the Cash Portfolio, the Treasury Portfolio and the
Treasury Plus Portfolio usually intend to hold securities purchased until
maturity, at which time they will be redeemable at their full principal value
plus accrued interest, they may, at times, engage in short-term trading to
attempt to take advantage of yield variations in the short-term market. The
STAR Portfolio may sell a portfolio security without regard to the length of
time such security has been held if, in Standish's view, the security meets
certain criteria for disposal. The Portfolios also may sell portfolio
securities prior to maturity based on a revised evaluation of the
creditworthiness of the issuer or to meet redemptions. In the event there are
unusually heavy redemption requests due to changes in interest rates or
otherwise, the Portfolios may have to sell a portion of their investment
portfolio at a time when it may be disadvantageous to do so. However, each
Portfolio believes that its ability to borrow funds to accommodate redemption
requests may mitigate in part the necessity for such portfolio sales during
these periods.
STRATEGIC TRANSACTIONS. The STAR Portfolio may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rates, currency exchange rates and broad or specific fixed income market
movements), to manage the effective maturity or duration of fixed income
securities, or to enhance potential gain. Such strategies are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
used by the STAR Portfolio may change over time as new instruments and
strategies are developed or regulatory changes occur. In the course of pursuing
its investment objective, the STAR Portfolio may purchase and sell (write)
exchange-listed and over-the-counter put and call options on securities,
indices and other financial instruments; purchase and sell financial futures
contracts and options thereon; enter into various interest rate transactions
such as swaps, caps, floors or collars; and, to the extent the STAR Portfolio
invests in foreign securities, enter into currency transactions such as forward
foreign currency exchange contracts, currency futures contracts, currency swaps
and options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used in to seek
to protect against possible changes in the market value of securities held in
or to be purchased for the STAR Portfolio's portfolio resulting from securities
markets, currency exchange rate or interest rate fluctuations, to seek to
protect the STAR Portfolio's unrealized gains in the value of portfolio
securities, to facilitate the sale of such securities for
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investment purposes, to seek to manage the effective maturity or duration of
STAR Portfolio's portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. In addition to the hedging transactions referred to in the
preceding sentence, Strategic Transactions may also be used to enhance
potential gain in circumstances where hedging is not involved.
The ability of the STAR Portfolio to utilize Strategic Transactions
successfully will depend on Standish's ability to predict pertinent market and
interest rate movements, which cannot be assured. The STAR Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The STAR Portfolio's activities
involving Strategic Transactions may be limited in order to enable certain of
its investors to comply with the requirements of the Code for qualification as
a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
Standish's view as to certain market, interest rate or currency movements is
incorrect, the risk that the use of such Strategic Transactions could result in
losses greater than if they had not been used. The writing of put and call
options may result in losses to the STAR Portfolio, force the purchase or sale,
respectively, of portfolio securities at inopportune times or for prices higher
than (in the case of purchases due to the exercise of put options) or lower
than (in the case of sales due to the exercise of call options) current market
values, limit the amount of appreciation the STAR Portfolio can realize on its
investments or cause the STAR Portfolio to hold a security it might otherwise
sell.
The use of options and futures transactions entails certain other risks.
Futures markets are highly volatile and the use of futures may increase the
volatility of the STAR Portfolio's net asset value. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the STAR Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the STAR Portfolio's position. The writing of options could
significantly increase the STAR Portfolio's portfolio turnover rate and
associated brokerage commissions or spreads. In addition, futures and options
markets may not be liquid in all circumstances and certain over-the-counter
options may have no markets. As a result, in certain markets, the STAR
Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Losses resulting from the use of Strategic
Transactions could reduce the STAR Portfolio's net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. Although the use of futures and options transactions for hedging and
managing effective maturity and duration should tend to minimize the risk of
loss due to a decline in the value of the position, at the same time, such
transactions can limit any potential gain which might result from an increase
in value of such position. The loss incurred by the STAR Portfolio in writing
options and entering into futures transactions is potentially unlimited. The
use of currency transactions can result in the STAR Portfolio incurring losses
as a result of a number of factors including the imposition of exchange
controls, suspension of settlements, or the inability to deliver or receive a
specified currency.
The STAR Portfolio will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes to 1% of its net
assets. See the SAI for further information regarding the use of Strategic
Transactions.
TEMPORARY DEFENSIVE INVESTMENTS. The STAR Portfolio may adopt a temporary
defensive position during adverse market conditions by investing without limit
in high quality money market instruments,
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including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, commercial
paper, floating-rate notes and repurchase agreements.
PORTFOLIO TURNOVER. A high rate of portfolio turnover (100% or more) involves
correspondingly higher transaction costs which must be borne directly by a
Portfolio and thus indirectly by its shareholders. It may also result in a
Portfolio's realization of larger amounts of short-term capital gains, a Fund's
distributions from which are taxable to a Fund's shareholders as ordinary
income.
INVESTMENT RESTRICTIONS. The investment objective and investment policies set
forth in this Prospectus for the Funds and the Portfolios are not fundamental
and may be changed by their respective Board of Trustees without approval of
shareholders. Each Fund and Portfolio have also adopted fundamental policies
which may not be changed without the approval of the Fund's shareholders. See
"Investment Restrictions" in the SAI. If any percentage restriction is adhered
to at the time of investment, a subsequent increase or decrease in the
percentage resulting from a change in the value of a Portfolio's assets will
not constitute a violation of the restriction. If there is a change in a
Portfolio's or Fund's investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their current
financial situation.
WHO SHOULD INVEST
The potential advantages offered by each Fund include large scale purchasing
power and diversification, which can help avoid the greater expense of
executing a large number of small transactions. The Funds also make it possible
for investors to participate in a more diversified portfolio than the size of
the investments might otherwise permit. Also, investment in the Funds can
relieve certain investors of many management and administrative burdens usually
associated with the direct purchase and sale of money market instruments,
including selecting portfolio investments; obtaining favorable terms at which
to buy and sell; scheduling and monitoring maturities and reinvestments;
safe-keeping of securities, and portfolio recordkeeping.
ADDITIONAL INFORMATION CONCERNING INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own portfolio
securities, the Funds seek to achieve their investment objective by investing
all of their investable assets in their corresponding Portfolio, each of which
is, or is a series of, an open-end investment management company registered
under the 1940 Act. The Portfolios have the same investment objective and
policies as their corresponding Fund. In addition to selling its beneficial
interests to a Fund, a Portfolio may sell shares to other mutual funds,
collective investment vehicles, or institutional investors. These investors
will invest in a Portfolio on the same terms and conditions and will pay a
proportionate share of such Portfolio's expenses. However, these other
investors may be subject to different operating expenses than those of the
Funds. Therefore, investors in each Fund should be aware that these differences
may result in differences in returns experienced by institutional investors
investing directly in a Portfolio and investors investing in different funds
and other pooled investment vehicles that invest in a Portfolio. Such
differences in returns are also present in other mutual fund structures.
Information concerning other shareholders of the Portfolios can be obtained
from the Funds by calling 1-888-637-7622 for the Cash Portfolio, Treasury
Portfolio and Treasury Plus Portfolio and 1-800-221-4795 for the STAR
Portfolio.
Certain changes in a Portfolio's investment objective, policies or restrictions
may preclude its corresponding Fund from investing its investable assets in the
Portfolio and/or require the Fund
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to withdraw its interest in the Portfolio. Any such withdrawal could result in
an "in-kind" distribution of securities (as opposed to a cash distribution)
from the Portfolio. If securities are distributed, the Fund could incur
brokerage, tax or other charges in converting the securities to cash. The
in-kind distribution may result in the Fund having a less diversified portfolio
of investments or adversely affect the liquidity of the Fund. Notwithstanding
the above, there are other means for meeting shareholder redemption requests,
such as borrowing.
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in a Portfolio. For example, if a large fund
withdraws from a Portfolio, the remaining funds may subsequently experience
higher pro-rata operating expenses, thereby producing lower returns.
Additionally, because the Portfolio would become smaller, it may become less
diversified, resulting in increased portfolio risk; however, these
possibilities exist for traditionally structured funds which have large or
institutional investors who may withdraw from a fund. Also, funds with a
greater pro-rata ownership in a Portfolio could have effective voting control
of the operations of the Portfolio. If a Fund is requested to vote on matters
pertaining to its corresponding Portfolio (other than a vote by the Fund to
continue the operation of the Portfolio upon the withdrawal of another investor
in the Portfolio), the Fund will hold a meeting of its shareholders and will
cast all of its votes proportionately as instructed by such shareholders. A
Fund will vote the shares held by Fund shareholders who do not give voting
instructions in the same proportion as the shares of Fund shareholders who do
give voting instructions. Therefore, Fund shareholders who do not vote will
have no effect on the outcome of such matters.
A Fund may withdraw its investment from its corresponding Portfolio at any
time, if the Fund's Board of Trustees determines that it is in the best
interest of the Fund to do so. Upon any such withdrawal, the Board of Trustees
would consider what action might be taken, including the investment of all of
the investable assets of the Fund in another pooled investment entity having
substantially the same investment objective as the Fund or the retaining of an
investment adviser to manage the Fund's assets in accordance with the
investment policies described above. In the event the Trustees were unable to
find a substitute investment company in which to invest the Fund's assets or
were unable to secure directly the services of an investment adviser, the
Trustees would determine the best course of action under the circumstances.
In addition, each Fund offers three classes of shares to investors, Premium
Class, Institutional Class and Investment Class shares, all three of which
represent interests in such Fund. The three classes differ in that (i) the
Institutional Class shares impose a shareholder servicing fee equal to a
\maximum of 0.25% of average daily net assets of the Institutional Class
shares; (ii) the Investment Class shares impose a shareholder servicing fee and
a 12b-1 fee each equal to a maximum of 0.25% of average daily net assets of the
Investment Class shares and; (iii) the Premium Class shares charge no
shareholder servicing or 12b-1 fees but require a much higher initial
investment than the other classes.
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS
TRUSTEES AND OFFICERS
The business and affairs of each Fund are managed under the direction of the
Board of Trustees of the Trust. The business and affairs of the Cash Portfolio,
the Treasury Portfolio and the Treasury Plus Portfolio are managed under the
direction of the Board of Trustees of the Portfolio Trust. The business and
affairs of the STAR Portfolio are managed under the direction of the Board of
Trustees of the Standish Portfolio Trust. Each Board of Trustees approves all
significant agreements between each Fund or Portfolio and the persons and
companies that furnish services to a Fund or Portfolio, including (when
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applicable) agreements with its investment adviser, administrator, fund
accountant, custodian and transfer agent. The day-to-day operations of each
Fund are delegated to its corresponding Portfolio's investment manager and such
Fund's officers. See "Management of the Funds and the Portfolios" in the SAI
for more information about the Trustees and officers of the Trust, the
Portfolio Trust and the Standish Portfolio Trust.
INVESTMENT ADVISER AND SUB-ADVISERS
The Trust has not retained the services of an investment adviser with respect
to the Funds because each Fund seeks to achieve its investment objective by
investing all of its investable assets in its corresponding Portfolio. The Cash
Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio have retained
the services of Investors Bank as investment adviser pursuant to investment
adviser agreements (each an "Adviser Agreement"). Under the Adviser Agreement,
Investors Bank continuously reviews and supervises the Cash Portfolio's, the
Treasury Portfolio's and the Treasury Plus Portfolio's investment program.
Investors Bank discharges its responsibilities subject to the supervision of,
and policies established by the Board of Trustees of the Portfolio Trust.
Investors Bank was organized in 1969 as a Massachusetts-chartered trust company
and provides domestic and global custody, multi-currency accounting,
institutional transfer agency, performance measurement, foreign exchange,
securities lending and mutual fund administration services to a variety of
financial asset managers, including mutual fund complexes, investment advisers,
banks and insurance companies. Investors Bank is a wholly-owned subsidiary of
Investors Financial Services Corp., a publicly-held corporation and holding
company registered under the Bank Holding Company Act of 1956. The business
address of Investors Bank is 200 Clarendon Street, Boston, Massachusetts 02116.
Investors Bank began acting as an investment adviser at the commencement of
operations of the Cash Portfolio (November 21, 1996) but otherwise has no
previous experience in providing investment advisory services. See
"Administrator, Transfer Agent, Custodian and Fund Accountant" for information
regarding fees paid to Investors Bank by the Portfolios.
The Cash Portfolio has retained the services of AAM as its investment
sub-adviser pursuant to an Investment Sub-Adviser Agreement (the "AAM
Sub-Adviser Agreement") between Investors Bank and AAM. In accordance with the
AAM Sub-Adviser Agreement, AAM manages the Cash Portfolio, selects investments
and places all orders for the purchase and sale of the Cash Portfolio's
securities, subject to the general supervision of the Portfolio Trust's Board
of Trustees and Investors Bank and in accordance with the Cash Portfolio and
Cash Series' investment objective, policies and restrictions. AAM is an
indirect, wholly-owned subsidiary of Allmerica Financial Corporation. As of
December 31, 1998, AAM had discretionary investment authority of accounts
exceeding $13.47 billion. The business address of AAM is 440 Lincoln Street,
Worcester, Massachusetts 01653. For its services as investment sub-adviser to
the Cash Portfolio, AAM is rendered an annual fee, computed and paid monthly by
Investors Bank, based on the average net assets of the Portfolio according to
the following schedule: 0.09% on the first $500,000,000 in assets; 0.07% on the
next $500,000,000 in assets; and 0.06% on assets exceeding $1,000,000,000 of
the Cash Portfolio.
The Treasury Portfolio and the Treasury Plus Portfolio have each retained the
services of M&I as its investment sub-adviser pursuant to an Investment
Sub-Adviser Agreement (the "M&I Sub-Adviser Agreement") between Investors Bank
and M&I. Under the M&I Sub-Adviser Agreement, M&I manages the Treasury
Portfolio and the Treasury Plus Portfolio, selects investments and places all
orders for the purchase and sale of the Treasury Portfolio and the Treasury
Plus Portfolio's securities, subject to the general supervision of the
Portfolio Trust's Board of Trustees and Investors Bank and in accordance with
the Treasury Portfolio, the Treasury Plus Portfolio, Treasury Series and
Treasury Plus Series' investment objective, policies and restrictions. M&I, a
registered investment adviser under the Investment Advisers
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Act of 1940, is a first tier wholly owned subsidiary of Marshall & Isley
Corporation, a publicly held bank holding company with shares listed on the
NASDAQ Stock Market. As of December 31, 1998, M&I managed approximately $9.5
billion in assets for various individual and institutional accounts, including
registered investment companies. The business address of M&I is 1000 North
Water Street, Milwaukee, Wisconsin 53202. For its services as investment
sub-adviser to the Treasury Portfolio and the Treasury Plus Portfolio, M&I is
paid a monthly fee by Investors Bank computed at an annual rate of 0.08% of the
average daily net assets of each of the Treasury Portfolio and the Treasury
Plus Portfolio.
Standish serves as investment adviser to the STAR Portfolio pursuant to an
investment adviser agreement (the "Standish Adviser Agreement") between the
STAR Portfolio and Standish. Under the Standish Adviser Agreement, Standish
manages the STAR Portfolio, selects investments and places all orders for the
purchase and sale of the STAR Portfolio's securities, subject to the general
supervision of the Standish Portfolio Trust's Board of Trustees and in
accordance with the STAR Portfolio and STAR Series' investment objective,
policies and restrictions. Standish is a Massachusetts corporation incorporated
in 1933 and is a registered investment adviser under the Investment Advisers
Act of 1940. Standish provides fully discretionary management services and
counseling and advisory services to a broad range of clients throughout the
United States and abroad. As of December 31, 1998, Standish had approximately
$46 billion in assets under management. The business address of Standish is One
Financial Center, Boston, Massachusetts 02111. For its services as investment
adviser to the STAR Portfolio, Standish is paid a monthly fee by the STAR
Series, computed at an annual rate of 0.25% of the average daily net assets of
the STAR Series. The STAR Portfolio has two portfolio managers, Ms. Jennifer
Pline and Ms. Barbara J. McKenna. Ms. Pline has been a portfolio manager of the
STAR Portfolio's portfolio since January 1, 1991. During the past five years,
Ms. Pline has served as a Vice President of Standish. Ms. McKenna has been a
portfolio manager of the STAR Portfolio's portfolio since January 1998. Ms.
McKenna has served as a Vice President of Standish since 1996. Prior to joining
Standish, from 1993 to 1996, Ms. McKenna managed institutional fixed income
accounts at BayBank.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Funds Distributor, Inc. (the
"Distributor") serves as the distributor of shares of the Funds. The
Distributor is a broker-dealer registered with the SEC and is a member of the
National Association of Securities Dealers, Inc. ("NASD") The Distributor is
authorized by the NASD to act as a mutual fund underwriter and distributor. The
principal offices of the Distributor are located at 60 State Street, Suite
1300, Boston, Massachusetts 02109. The Distributor does not receive a fee from
the Trust pursuant to the terms of the Distribution Agreement.
ADMINISTRATOR, TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT
Investors Bank serves as Administrator to the Funds and IBT Trust & Custodial
Services (Ireland) LMTD ("IBT Ireland"), a subsidiary of Investors Bank, serves
as Administrator to the Portfolios. The services provided by Investors Bank and
IBT Ireland include certain accounting, clerical and bookkeeping services, Blue
Sky (for the Funds only), corporate secretarial services and assistance in the
preparation and filing of tax returns and reports to shareholders and the SEC.
Investors Bank also serves as transfer and dividend paying agent for the Funds
and IBT Fund Services (Canada) Inc., ("IBT Canada") a subsidiary of Investors
Bank, serves as transfer and dividend paying agent for the Portfolios. As
transfer agent, Investors Bank is responsible for the issuance, transfer and
redemption of interests, the establishment and maintenance of accounts and the
payment of distributions for each Fund and IBT Canada is responsible for
maintaining records of holders in interest and for the payment of distributions
for each Portfolio.
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Investors Bank also acts as custodian for the Funds and for the Portfolios. As
custodian, Investors Bank holds cash, securities and other assets of the Funds
and the Portfolios as required by the 1940 Act. IBT Canada also serves as fund
accounting agent for the Funds and the Portfolios. As fund accounting agent,
IBT Canada performs certain accounting, clerical and bookkeeping services, and
the daily calculation of net asset value for each Fund and Portfolio.
For its services as Investment Adviser, Administrator, Transfer Agent,
Custodian and Fund Accounting Agent, the Cash Portfolio, the Treasury Portfolio
and the Treasury Plus Portfolio each pay Investors Bank an aggregate fee, which
is calculated daily and paid monthly, at an annual rate of 0.17% of the average
daily net assets of such Portfolio. For its services as Transfer Agent,
Custodian and Fund Accounting Agent, the STAR Portfolio pays Investors Bank an
aggregate fee, which is calculated daily and paid monthly, at an annual rate of
0.05% of the first $50 million of average daily net assets, 0.03% of the next
$100 million of average daily net assets and .01% of average daily net assets
over $150 million. For its services as Administrator, Transfer Agent, Custodian
and Fund Accounting Agent, the Cash Series, the Treasury Series and the
Treasury Plus Series each pays Investors Bank an aggregate fee, which is
calculated daily and paid monthly, at an annual rate of 0.01% of the average
daily net assets of such Fund and the STAR Series pays Investors Bank an
aggregate fee, calculated daily and paid monthly, at an annual rate of 0.03% of
the average daily net assets of the STAR Series. Investors Bank is solely
responsible for the payment of all fees to AAM, M&I and to its subsidiaries.
COUNSEL AND INDEPENDENT AUDITORS
Goodwin, Procter & Hoar LLP serves as counsel to the Trust and the Portfolio
Trust. Ernst & Young LLP serves as the independent auditors to the Trust and
the Portfolio Trust. PricewaterhouseCoopers L.L.P. serves as the independent
accountants to the Standish Portfolio Trust and Hale and Dorr LLP serves as
counsel to the Standish Portfolio Trust.
VALUATION OF SHARES
The net asset value per share of each Fund is determined each Business Day.
This determination is made once each day as of 4:00 p.m. (ET) for the Cash
Series and the Treasury Plus Series, as of 2:00 p.m. (ET) for the Treasury
Series, and as of the close of trading on the NYSE for the STAR Series.
The net asset value per share of a Fund for purposes of pricing sales and
redemptions is calculated by adding the value of all securities and other
assets of such Fund (including its interest in the corresponding Portfolio),
then subtracting the liabilities charged to the Fund, and then dividing the
result by the number of outstanding shares of the Fund.
The securities in the Cash Portfolio, the Treasury Portfolio and the Treasury
Plus Portfolio are valued based upon the amortized cost method which involves
valuing a security at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium. Although the amortized cost method
provides consistency in valuation, it may result in periods during which the
stated value of a security is higher or lower than the price the Cash
Portfolio, Treasury Portfolio or Treasury Plus Portfolio would receive if the
security were sold. This method of valuation is used in order to stabilize the
net asset value of shares of the Cash Series, the Treasury Series or the
Treasury Plus Series at $1.00; however, there can be no assurance that a Fund's
net asset value will always remain at $1.00 per share.
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With respect to the STAR Portfolio, the fixed income securities (other than
money market instruments) for which accurate market prices are readily
available are valued at their current market value on the basis of quotations,
which may be furnished by a pricing service or provided by dealers in such
securities. Securities not listed on an exchange or national securities market,
certain mortgage-backed and asset-backed securities and securities for which
there were no reported transactions are valued at the last quoted bid prices.
Fixed income securities for which accurate market prices are not readily
available and all other assets are valued at fair value as determined in good
faith by Standish in accordance with procedures approved by the Trustees of the
Standish Portfolio Trust, which may include the use of yield equivalents or
matrix pricing. Money market instruments with less than sixty days remaining to
maturity when acquired by the Standish Portfolio are valued on an amortized
cost basis unless the Trustees of the Standish Portfolio Trust determine that
amortized cost does not represent fair value. If the Standish Portfolio
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees of the Standish Portfolio Trust determine during such
sixty-day period that amortized cost does not represent fair value.
PURCHASES AND REDEMPTIONS
PURCHASES
GENERAL INFORMATION. Investors may purchase Fund shares only through the
Distributor which offers each Fund's shares to the public on a continuous
basis. Shares of each Fund may be purchased only in those states where they may
be lawfully sold. Shares are sold at net asset value per share next computed
after the purchase order is received in good order by the Distributor and
payment for shares is received by Investors Bank, the Funds' Custodian. See the
Account Application or call 1-888-MERRMAC for instructions on how to make
payment for shares to the Custodian. Shareholders may also make general
inquiries by calling 1-888-MERRMAC.
INVESTMENT MINIMUM. The minimum initial investment for Premium Class shares of
the Funds is $10 million. Institutions may satisfy the minimum investment by
aggregating their fiduciary accounts. The minimum initial investment for
Institutional Class and Investment Class shares is $10,000. Subsequent
purchases may be in any amount. Each Fund reserves the right to waive the
minimum initial investment. When a Premium Class shareholder's account balance
falls below $1 million due to redemption, a Fund may close the account. Such
shareholders will be notified if the minimum balance is not being maintained
and will be allowed 60 days to make additional investments before the account
is closed.
CLASS LEVEL EXPENSES; DISTRIBUTION AND SHAREHOLDER SERVICING. Assets of the
Premium Class shares of each Fund are not subject to a shareholder servicing or
12b-1 fee. Assets of the Institutional Class shares of each Fund are subject to
a shareholder servicing fee of up to 0.25% of average daily net assets of the
Institutional Class shares. Assets of the Investment Class shares of each Fund
are subject to a shareholder servicing fee and 12b-1 fee each up to 0.25% of
average daily net assets of the Investment Class shares. The Institutional and
Investment Class of each Fund offers shares through certain financial
intermediaries, including Investors Bank ("Service Organizations"), which have
entered into shareholder servicing agreements with each Fund. Under such
agreements, Service Organizations agree to perform certain shareholder
servicing, administrative and accounting services for their clients and
customers who are beneficial owners of Fund shares. The Trust's Board of
Trustees has approved a Distribution Plan under Rule 12b-1 of the 1940 Act with
respect to the Investment Class shares of each Fund. Under the Distribution
Plan, the Distribution Agent (defined therein) is entitled to receive a fee (as
set forth above) from each Fund with respect to the assets contributed to such
Fund by shareholders who are clients or customers of the Distribution Agent.
Share purchase orders are deemed to be in good order on the date a Fund
receives a completed Account Application (and other documents required by the
Trust) and federal funds become available to the Fund in the Fund's account
with Investors Bank.
Purchases may be made only by wire. Wiring instructions for purchases of shares
of a Fund are as follows:
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Investors Bank & Trust Company
ABA #: 011001438
Attn: [Name of Fund]
DDA #: 717171333
Name of Account
Account #
Amount of Wire:
A bank may impose a charge to execute a wire transfer. A purchaser must call
1-888-MERRMAC to inform Investors Bank of an incoming wire transfer. A purchase
order for shares received in proper form by 4:00 p.m. (ET) for the Cash Series
and the Treasury Plus Series, by 2:00 p.m. (ET) for the Treasury Series, and by
the close of trading on the NYSE (normally 4:00 p.m. (ET)), for the STAR
Series, on a Business Day will be executed at the net asset value per share
next determined after receipt of the order, provided that Investors Bank
receives the wire by the close of business on the day the purchase order is
received. Purchase orders received after 4:00 p.m. (ET) for the Cash Series and
the Treasury Plus Series, after 2:00 p.m. (ET) for the Treasury Series, and
after the close of trading on the NYSE for the STAR Series will be effected on
the next Business Day if cleared funds are received before the close of
business on the next Business Day. Purchase orders for shares for which payment
has not been received by the close of business will not be accepted, and notice
thereof will be given to the purchaser. The Cash Series and the Treasury Plus
Series also may limit the amount of a purchase order received between 3:00 p.m.
(ET) and 4:00 p.m. (ET).
On days when the financial markets close early, such as the day after
Thanksgiving and Christmas Eve, all purchase orders must be received by 12:00
noon (ET).
Each Fund reserves the right in its sole discretion (i) to suspend the offering
of a Fund's shares, (ii) to reject purchase orders when in the best interest of
a Fund and (iii) to modify or eliminate the minimum initial investment in Fund
shares. Purchase orders may be refused if, for example, they are of a size that
could disrupt management of a Portfolio.
REDEMPTIONS
Shareholders may redeem all or a portion of their shares on any Business Day.
Shares will be redeemed at the net asset value next determined after Investors
Bank has received a proper notice of redemption as described below. If notice
of redemption is received prior to 4:00 p.m. (ET) for the Cash Series and the
Treasury Plus Series, prior to 2:00 p.m. (ET) for the Treasury Series, and
prior to the close of trading on the NYSE (normally 4:00 p.m. (ET)) for the
STAR Series, on a Business Day, the redemption will be effective on the date of
receipt for the Cash Series, Treasury Plus Series and Treasury Series and on
the day following the date of receipt for the STAR series. Proceeds of the
redemption will ordinarily be made by wire on the date of receipt, but in any
event within three Business Days from the date of receipt, except for the STAR
Series wherein proceeds of the redemption will ordinarily be made by wire on
the day following the date of receipt, but in any event within four Business
Days from the date of receipt.
Shareholder redemption requests received after 4:00 p.m. (ET) for the Cash
Series and the Treasury Plus Series, after 2:00 p.m. (ET) for the Treasury
Series, and after the close of trading on the NYSE (normally 4:00 p.m. (ET)),
for the STAR Series, on a Business Day, will ordinarily receive payment by wire
on the next Business Day, but, in any event, within four Business Days from the
date of receipt of a proper notice of redemption, except for the STAR Series
wherein payment will ordinarily be received by wire on the second Business Day
after the date of receipt, but in any event within five Business Days from the
date of receipt. All redemption requests regarding shares of the Cash Series
and the Treasury Plus Series placed between 3:00 p.m. and 4:00 p.m. (ET) may
only be placed by telephone.
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Each Fund reserves the right in its sole discretion to suspend redemptions or
postpone payments when the NYSE is closed or when trading is restricted for any
reason or under emergency circumstances as determined by the SEC. The Cash
Series and the Treasury Plus Series each reserve the right to postpone payments
for redemption requests received between 3:00 p.m. and 4:00 p.m. (ET) until the
next Business Day.
On days when the financial markets close early, such as the day after
Thanksgiving and Christmas Eve, all redemption orders must be received by 12:00
noon (ET).
A shareholder may elect to receive payment in the form of a wire or check.
There is no charge imposed by a Fund to redeem shares; however, in the case of
redemption by wire, a shareholder's bank may impose its own wire transfer fee
for receipt of the wire.
REDEMPTION BY WIRE. To redeem shares by wire, a shareholder or any authorized
agent (so designated on the Account Application) must provide Investors Bank
with the dollar amount to be redeemed, the account to which the redemption
proceeds should be wired (such account must have been previously designated by
the shareholder on its Account Application, the name of the shareholder and the
shareholder's account number.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by writing to
Investors Bank with a signature guaranteed by a national bank which is a member
firm of any national or regional securities exchange (a "Signature Guarantee").
If the guarantor institution belongs to one of the Medallion Signature
Programs, it must use the specific Medallion "Guaranteed" stamp. Notarized
signatures are not sufficient. Further documentation may be required when
Investors Bank deems it appropriate.
REDEMPTION BY MAIL. A shareholder who desires to redeem shares by mail may do
so by mailing proper notice of redemption directly to Investors Bank, ATTN:
Transfer Agency, OPS 22, P.O. Box 9130, Boston, MA 02117-9130. Proper notice of
redemption includes written notice requesting redemption along with the
signature of all persons in whose names the shares are registered, signed
exactly as the shares are registered. In certain instances, Investors Bank may
require additional documents such as trust instruments or certificates of
corporate authority. Payment will be mailed to the address of record within
seven days of receipt of a proper notice of redemption.
TELEPHONE REDEMPTION. A shareholder may request redemption by calling Investors
Bank at 1-888-MERRMAC. The telephone redemption option is made available to
shareholders of a Fund on the Account Application. Each Fund reserves the right
to refuse a telephone request for redemption if it believes that it is
advisable to do so. Procedures for redeeming shares by telephone may be
modified or terminated at any time by a Fund. Neither the Funds nor Investors
Bank will be liable for following redemption instructions received by telephone
that are reasonably believed to be genuine, and the shareholder will bear the
risk of loss in the event of unauthorized or fraudulent telephone instructions.
Each Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. A Fund may be liable for any losses due
to unauthorized or fraudulent instructions in the absence of following these
procedures. Such procedures may include requesting personal identification
information or recording telephone conversations. Redemption checks will be
made payable to the registered shareholder(s) and sent to the address of record
on file with Investors Bank. Payments by wire will only be made to the
registered shareholder through pre-existing bank account instructions.
No bank instruction changes will be accepted over the telephone. See
"Redemption By Wire" for information on how to change bank instructions.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to declare as a dividend substantially all of its net
investment income at the close of each Business Day and will pay such dividends
monthly. Shareholders of the Cash Series, the Treasury Series and the Treasury
Plus Series shall be entitled to receive dividends on the Business Day their
purchase is effected but shall not receive dividends on the Business Day that
their redemption is effected. Shareholders of the STAR Series shall be entitled
to receive dividends on the Business Day after their purchase is effected
through the Business Day that their redemption is effected. Distributions of
net capital gains, if any, for the year are made annually at the discretion of
the officers of the Fund. Dividends and/or capital gain distributions will be
reinvested automatically in additional shares of a Fund at net asset value and
such shares will be automatically credited to a shareholder's account, unless a
shareholder elects to receive either dividends or capital gains distributions
(or both) in cash. Shareholders may change their distribution option at any
time by writing to Investors Bank with a Signature Guarantee prior to the
record date of any such dividend or distribution.
TAXES
The following summary of Federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial, or
administrative action. No attempt has been made to present a detailed
explanation of the Federal, state, or local income tax treatment of a Fund or
its shareholders. Accordingly, shareholders are urged to consult their tax
advisers regarding specific questions concerning their individual
circumstances.
TAX STATUS OF EACH FUND
Each Fund intends to qualify and elect to be treated as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). If
it so qualifies, a Fund will not be subject to U.S. federal income taxes on its
net investment income (i.e., its investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and net capital gain (the excess of net realized long-term
capital gain over net realized short-term capital loss), if any, that it
distributes to its shareholders in each taxable year, provided that it
distributes to its shareholders at least 90% of the sum of its net investment
income and any net tax-exempt interest for such taxable year. If in any year a
Fund fails to qualify as a regulated investment company, the Fund would incur
regular corporate federal income tax on its taxable income for that year and be
subject to certain additional distribution requirements upon requalification.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and capital gain
net income. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
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TAX STATUS OF DISTRIBUTIONS
All dividends and distributions to shareholders of each Fund of investment
company taxable income will be taxable to shareholders whether paid in cash or
reinvested in additional shares. For federal income tax purposes, distributions
of net investment income, which includes the excess of a Fund's net realized
short-term capital gain over its net realized long-term capital loss, are
taxable to shareholders as ordinary income.
Distributions of net realized long-term capital gains designated by a Fund as
"capital gain dividends" will be taxable as long-term capital gains, whether
paid in cash or additional shares, regardless of how long the shares have been
held by such shareholders, capital gain dividends will not, and the Funds'
distributions of net investment income generally will not, be eligible for the
corporate dividends received deduction. For shareholders other than
corporations, long-term capital gain dividends currently are taxed at more
favorable federal income tax rates than ordinary income and short-term capital
gains. Recent changes in federal tax law, as applied to a Fund, allow for
capital gain dividends to be taxed to such shareholders at maximum rates of
20%.
Gain or loss, if any, recognized on the sale or other disposition of shares of
a Fund will be taxed as capital gain or loss if the shares are capital assets
in the shareholder's hands and the transaction is treated as a sale for tax
purposes. Since the Cash Series, the Treasury Plus Series and the Treasury
Series attempt to maintain a stable net asset value of $1.00 per share, it is
anticipated that gain or loss would generally not result upon dispositions of
the shares of these Funds. Generally, a shareholder's gain or loss, if any,
will be a long term gain or loss if the shares have been held for more than one
year, although a holding period greater than eighteen months will be necessary
in order to benefit from the lowest capital gain tax rate currently in effect
for noncorporate shareholders. If a shareholder sells or otherwise disposes of
shares of a Fund before holding them for more than six months, any loss on the
sale or other disposition of such shares will be treated as a long-term capital
loss to the extent of any capital gain dividends received by the shareholder
with respect to such shares. A loss realized on a sale or exchange of shares
may be disallowed if other shares are acquired within a 61-day period beginning
30 days before and ending 30 days after the date that the shares are sold.
PERFORMANCE INFORMATION
From time to time performance may be quoted in shareholder reports,
advertisements and other communications to shareholders or in other materials
in terms of yield, effective yield and average annual total return. Performance
figures are based upon historical earnings and are not intended to indicate
future performance.
The "yield" of the Cash Series, Treasury Series and the Treasury Plus Series
refers to income generated by an investment in such Fund over a seven-day
period, which period will be stated in the advertisement. This income is then
annualized, which means that the income generated during the seven-day period
is assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. "Effective yield" of the Cash Series, the
Treasury Series or Treasury Plus Series is calculated similarly to the yield,
but the income earned by the investment is assumed to be compounded weekly when
annualized. Effective yield will be slightly higher than yield due to this
compounding effect.
The "yield" of the STAR Series is computed by dividing the net investment
income per share earned during the period (generally 30 days or one month)
stated in the advertisement by the maximum offering price per share on the last
day of the period (using the average number of shares entitled to receive
dividends).
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In determining net investment income for purposes of calculating yield and
effective yield of any Fund, the calculation includes among expenses of the
Fund all recurring fees that are charged to all shareholder accounts and any
recurring charges for the period stated.
Average annual total return is determined by computing the average annual
percentage change in the value of $1,000 invested at the maximum public
offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. The Funds may also from time to
time advertise total return on a cumulative, average, year-by-year or other
basis for various specified periods by means of quotations, charts, graphs or
schedules.
In reports or other communications to shareholders or in other materials,
performance of each class of a Fund may be compared with that of other mutual
funds tracked by mutual fund rating services, to broad groups of comparable
mutual funds or to unmanaged indices that may assume investment of dividends
but generally do not reflect deductions for administrative and management
costs. Additional performance information is also available in a Fund's Annual
and Semi-Annual Reports, which are sent to all shareholders and which can be
obtained without charge from each Fund by calling 1-888-MERRMAC.
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MERRIMAC SERIES
200 Clarendon Street
Boston, Massachusetts 02116
1-888-MERRMAC
Statement of Additional Information
January 14, 1999 As Supplemented January 21, 1999
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Page
Additional Information About Investment Policies 2
Investment Restrictions 16
Management of the Funds and the Portfolios 20
Control Persons and Principal Holders of Securities 24
Investment Advisory Services 24
Distributor 26
Redemption of Shares 28
Portfolio Transactions 28
Net Asset Value Determination 30
Capital Stock and Other Securities 32
Taxation 34
Calculation of Performance Data 38
Additional Information 41
Legal Counsel, Independent Auditors/Accountants and Financial
Statements 41
</TABLE>
This Statement of Additional Information ("SAI") is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Merrimac
Series (the "Trust") current Prospectus dated January 14, 1999, (the
"Prospectus"). This SAI supplements and should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by writing the
Trust's distributor, Funds Distributor, Inc. (the "Distributor") at the
address, or by calling the toll-free telephone number, listed above.
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ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
The Merrimac Series (the "Trust"), an open-end management investment company,
consists of the following series: the Merrimac Cash Series (the "Cash Series"),
the Merrimac Treasury Series (the "Treasury Series"), the Merrimac Treasury
Plus Series (the "Treasury Plus Series"), and the Merrimac Short-Term Asset
Reserve Series (the "STAR Series") (each, a "Fund" and collectively, the
"Funds").
Unlike other mutual funds which directly acquire and manage their own
portfolios of securities, the Funds seek to achieve their investment objective
by investing all of their investable assets in the Merrimac Cash Portfolio
(the "Cash Portfolio"), the Merrimac Treasury Portfolio (the "Treasury
Portfolio"), the Merrimac Treasury Plus Portfolio (the "Treasury Plus
Portfolio"), and the Standish Short-Term Asset Reserve Portfolio (the "STAR
Portfolio"), respectively, (hereinafter each, a "Portfolio", and collectively,
the "Portfolios"). The Cash Portfolio, the Treasury Portfolio and the Treasury
Plus Portfolio are each a series of the Merrimac Master Portfolio (the
"Portfolio Trust"), a separate open-end management investment company. The STAR
Portfolio is a series of the Standish, Ayer & Wood Master Portfolio (the
"Standish Portfolio Trust"), also a separate open-end management investment
company. Each Portfolio has the same investment objective and policies as its
corresponding Fund. The Funds offer Premium, Institutional and Investment Class
shares.
The information below supplements the information set forth in the Prospectus
under "Investment Objectives and Policies" and "Description of Permitted
Investments and Related Risks." Since the investment characteristics of the
Funds correspond directly to those of their corresponding Portfolio, the
following discusses the various investment techniques employed by each
Portfolio.
MATURITY AND DURATION. The effective maturity of an individual portfolio
security in which the STAR Portfolio invests is defined as the period remaining
until the earliest date when the Portfolio can recover the principal amount of
such security through mandatory redemption or prepayment by the issuer, the
exercise by the Portfolio of a put option, demand feature or tender option
granted by the issuer or a third party or the payment of the principal on the
stated maturity date. The effective maturity of variable rate securities is
calculated by reference to their coupon reset dates. Thus, the effective
maturity of a security may be substantially shorter than its final stated
maturity. Unscheduled prepayments of principal have the effect of shortening
the effective maturities of securities in general and mortgage-backed
securities in particular. Prepayment rates are influenced by changes in current
interest rates and a variety of economic, geographic, social and other factors
and cannot be predicted with certainty. In general, securities, such as
mortgage-backed securities, may be subject to greater prepayment rates in a
declining interest rate environment. Conversely, in an increasing interest rate
environment, the rate of prepayment may be expected to decrease. A higher than
anticipated rate of unscheduled principal prepayments on securities purchased
at a premium or a lower than anticipated rate of unscheduled payments on
securities purchased at a discount may result in a lower yield (and total
return) to the Portfolio than was anticipated at the time the securities were
purchased. The Portfolio's reinvestment of
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unscheduled prepayments may be made at rates higher or lower than the rate
payable on such security, thus affecting the return realized by the Portfolio.
Duration of an individual portfolio security is a measure of the security's
price sensitivity taking into account expected cash flow and prepayments under
a wide range of interest rate scenarios. In computing the duration of its
portfolio, the Portfolio will have to estimate the duration of obligations that
are subject to prepayment or redemption by the issuer taking into account the
influences of interest rates on prepayments and coupon flows. The STAR
Portfolio may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, the use of mortgage swaps and interest rate swaps, caps,
floors and collars.
MONEY MARKET INSTRUMENTS AND REPURCHASE AGREEMENTS. The money market
instruments in which the Cash Portfolio and the STAR Portfolio invest, include
short-term U.S. Government securities (defined below), commercial paper
(promissory notes issued by corporations to finance their short-term credit
needs), negotiable certificates of deposit, non-negotiable fixed time deposits,
bankers' acceptances and repurchase agreements. The Treasury Portfolio invests
only in direct obligations of the U.S. Treasury and the Treasury Plus Portfolio
invests substantially all of its assets in direct obligations of the U.S.
Treasury in U.S. Government Securities and in repurchase agreements.
U.S. Government Securities include securities which are direct obligations of
the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal
Farm Credit Bank, the Central Bank for Cooperatives, Federal Intermediate
Credit Banks, Federal Home Loan Banks and the Federal National Mortgage
Association.
A repurchase agreement is an agreement under which a Portfolio acquires money
market instruments (generally U.S. Government Securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
a Portfolio and is unrelated to the interest rate on the instruments. The
instruments acquired by a Portfolio (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Portfolio until they are repurchased. The Board of
Trustees of the Portfolio Trust and the Standish Portfolio Trust will monitor
the standards that the investment adviser or sub-adviser will use in reviewing
the creditworthiness of any party to a repurchase agreement with a Portfolio.
See "Investment Advisory Services" for information regarding the investment
adviser and sub-adviser.
The use of repurchase agreements involves certain risks. For example, if the
seller defaults on its obligation to repurchase the instruments acquired by a
Portfolio at a time when their market value has declined, a Portfolio may incur
a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
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instruments acquired by a Portfolio are collateral for a loan by a Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Portfolio may not be able to substantiate its interest in the
instruments it acquires. It is expected that these risks can be controlled
through careful documentation and monitoring.
STRUCTURED OR HYBRID NOTES. As more fully described in the Prospectus, the STAR
Portfolio may invest in structured or hybrid notes. It is expected that not
more than 5% of the Portfolio's net assets will be at risk as a result of such
investments. In addition to the risks associated with a direct investment in
the benchmark asset, investments in structured and hybrid notes involve the
risk that the issuer or counterparty to the obligation will fail to perform its
contractual obligations. Certain structured or hybrid notes may also be
leveraged to the extent that the magnitude of any change in the interest rate
or principal payable on the benchmark asset is a multiple of the change in the
reference price. Leverage enhances the price volatility of the security and,
therefore, the Portfolio's net asset value ("NAV"). Further, certain structured
or hybrid notes may be illiquid for purposes of the STAR Portfolio's limitation
on investments in illiquid securities.
MORTGAGE-RELATED OBLIGATIONS. The STAR Portfolio may invest in mortgage-related
obligations. Some of the characteristics of mortgage-related obligations and
the issuers or guarantors of such securities are described below.
LIFE OF MORTGAGE-RELATED OBLIGATIONS. The average life of mortgage-related
obligations is likely to be substantially less than the stated maturities of
the mortgages in the mortgage pools underlying such securities. Prepayments or
refinancing of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of the principal invested long before
the maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is not
possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of
GNMA Certificates, however, will depend on the coupon rate of the financing.
GNMA CERTIFICATES. The Government National Mortgage Association ("GNMA") was
established in 1968 when the Federal National Mortgage Association ("FNMA") was
separated into two organizations, GNMA and FNMA. GNMA is a wholly-owned
government corporation within the Department of Housing and Urban Development.
GNMA developed the first mortgage-backed pass-through instruments in 1970 for
Farmers Home Administration-FHMA-insured, Federal Housing Administration-FHA-
insured and for Veterans Administration-or VA-guaranteed mortgages ("government
mortgages").
GNMA purchases government mortgages and occasionally conventional mortgages to
support the housing market. GNMA is known primarily, however, for its role as
guarantor of pass-through securities collateralized by government mortgages.
Under the GNMA securities guarantee program, government mortgages that are
pooled must be less than one year old by the
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<PAGE>
date GNMA issues its commitment. Loans in a single pool must be of the same
type in terms of interest rate and maturity. The minimum size of a pool is $1
million for single-family mortgages and $500,000 for manufactured housing and
project loans.
Under the GNMA II program, loans with different interest rates can be included
in a single pool and mortgages originated by more than one lender can be
assembled in a pool. In addition, loans made by a single lender can be packaged
in a custom pool (a pool containing loans with specific characteristics or
requirements).
GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA guarantee is
backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest on GNMA
Certificates is lower than the interest rate paid on the VA-guaranteed,
FHMA-insured or FHA-insured mortgages underlying the Certificates, but only by
the amount of the fees paid to GNMA and the issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06% of the outstanding principal for providing its guarantee,
and the issuer is paid an annual fee of 0.44% for assembling the mortgage pool
and for passing through monthly payments of interest and principal to GNMA
Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will be
earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after
issuance, GNMA Certificates may trade in the secondary market at a premium or
discount. Second, interest is paid monthly, rather than semi-annually as with
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates. Finally, the actual yield of each GNMA
Certificate is influenced by the prepayment experience of the mortgage pool
underlying the GNMA Certificate. If mortgagors prepay their mortgages, the
principal returned to GNMA Certificateholders may be reinvested at higher or
lower rates.
MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA mortgage-backed
securities program in 1970, the amount of GNMA Certificates outstanding has
grown rapidly. The size of the market and the active participation in the
secondary market by securities dealers and many types of investors make the
GNMA Certificates a highly liquid instrument. Prices of GNMA Certificates are
readily available from securities dealers and depend on, among other things,
the level of market rates, the GNMA Certificate's coupon rate and the
prepayment experience of the pools of mortgages backing each GNMA Certificate.
FHLMC PARTICIPATION CERTIFICATES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created by the Emergency Home Finance Act of 1970. It is a
private corporation, initially capitalized by the Federal Home Loan Bank
System, charged with supporting the mortgage lending activities of savings and
loan associations by providing an
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active secondary market for conventional mortgages. To finance its mortgage
purchases, FHLMC issues FHLMC Participation Certificates and Collateralized
Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of
mortgage loans. FHLMC purchases whole loans or participations in 30-year and
15-year fixed rate mortgages, adjustable-rate mortgages ("ARMs") and home
improvement loans. Under certain programs, it will also purchase FHA and VA
mortgages.
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread
for the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates. FHLMC requires
a minimum commitment of $1 million in mortgages but imposes no maximum amount.
Negotiated deals require a minimum commitment of $10 million. FHLMC guarantees
timely payment of the interest and the ultimate payment of principal of its
Participation Certificates. This guarantee is backed by reserves set aside to
protect against losses due to default. The FHLMC CMO is divided into varying
maturities with prepayment set specifically for holders of the shorter term
securities. The CMO is designed to respond to investor concerns about early
repayment of mortgages.
FHLMC's CMOs are general obligations, and FHLMC will be required to use its
general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying mortgage
pools pay principal and interest to CMO bondholders. The CMO is structured to
address two major short-comings associated with traditional pass-through
securities: payment frequency and prepayment risk. Traditional pass-through
securities pay interest and amortized principal on a monthly basis whereas CMOs
normally pay principal and interest semi-annually. In addition, mortgage-backed
securities carry the risk that individual mortgagors in the mortgage pool may
exercise their prepayment privileges, leading to irregular cash flow and
uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally referred to
as Classes A, B, C and Z. Each tranche is identified by its coupon and
maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth, Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
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The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The Adviser would purchase a
Z bond for the STAR Portfolio if it expected interest rates to decline.
FNMA SECURITIES. FNMA was created by the National Housing Act of 1938. In 1968,
the agency was separated into two organizations, GNMA to support a secondary
market for government mortgages and FNMA to act as a private corporation
supporting the housing market.
FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis. A single pool may include
mortgages with different loan-to-value ratios and interest rates, though rates
may not vary beyond two percentage points.
PRIVATELY-ISSUED MORTGAGE LOAN POOLS. Savings associations, commercial banks
and investment bankers issue pass-through securities secured by a pool of
mortgages.
Generally, only conventional mortgages on single-family properties are included
in private issues, though seasoned loans and variable rate mortgages are
sometimes included. Private placements allow purchasers to negotiate terms of
transactions. Maximum amounts for individual loans may exceed the loan limit
set for government agency purchase. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private
placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in
force. Each mortgage, regardless of original loan-to-value ratio, is insured to
100% of principal, interest and other expenses, to a total aggregate loss limit
stated on the policy. The aggregate loss limit of the policy generally is 5% to
7% of the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors.
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Before rating an issue, a nationally recognized statistical rating organization
such as Standard & Poor's Rating Group ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's"), Fitch's IBCA Investors Service ("Fitch") or Duff and
Phelps ("Duff") will consider several factors, including: the creditworthiness
of the issuer; the issuer's track record as an originator and servicer; the
type, term and characteristics of the mortgages, as well as loan-to-value ratio
and loan amounts; the insurer and the level of mortgage insurance and hazard
insurance provided. Where an equity reserve account or letter of credit is
offered, the rating agency will also examine the adequacy of the reserve and
the strength of the issuer of the letter of credit.
STRATEGIC TRANSACTIONS. The STAR Portfolio may, but is not required to, utilize
various other investment strategies as described below to seek to hedge various
market risks (such as interest rates and broad or specific fixed-income market
movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
used by the STAR Portfolio may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing its investment objective, the STAR Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used to seek to protect against possible changes in the
market value of securities held in or to be purchased for the STAR Portfolio's
portfolio resulting from securities market or interest rate fluctuations, to
protect the STAR Portfolio's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of the STAR Portfolio's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
In addition to the hedging transactions referred to in the preceding paragraph,
Strategic Transactions may also be used by the STAR Portfolio to seek to
enhance potential gain in circumstances where hedging is not involved although
the STAR Portfolio will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for such purposes to not more than 1% of
its net assets at any one time and, to the extent necessary, the STAR Portfolio
will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating the STAR
Portfolio's net loss exposure from such Strategic Transactions, an unrealized
gain from a particular Strategic Transaction position would be netted against
an unrealized loss from a related Strategic Transaction position. For example,
if the STAR Portfolio's Adviser believes that short-term interest rates as
indicated in the forward yield curve are too high, the STAR Portfolio may take
a short position in a near-term Eurodollar futures contract and a long position
in a longer-dated Eurodollar futures contract. Under such
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circumstances, any unrealized loss in the near-term Eurodollar futures position
would be netted against any unrealized gain in the near-term Eurodollar futures
position (and vice versa) for purposes of calculating the STAR Portfolio's net
loss exposure.
The ability of the STAR Portfolio to utilize these Strategic Transactions
successfully will depend on its Adviser's ability to predict pertinent market
and interest rate movements, which cannot be assured. The STAR Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The STAR Portfolio's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
that apply to investors in the STAR Portfolio that intend to qualify as
regulated investment companies.
RISKS OF STRATEGIC TRANSACTIONS. The use of Strategic Transactions by the STAR
Portfolio has associated risks including possible default by the other party to
the transaction, illiquidity and, to the extent its Adviser's view as to
certain market or interest rate movements is incorrect, the risk that the use
of such Strategic Transactions could result in losses greater than if they had
not been used. Writing put and call options may result in losses to the STAR
Portfolio, force the purchase or sale, respectively, of portfolio securities at
inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the STAR Portfolio can realize on its investments or cause the
STAR Portfolio to hold a security it might otherwise sell.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
STAR Portfolio creates the possibility that losses on the hedging instrument
may be greater than gains in the value of the STAR Portfolio's position.
Writing options could significantly increase the STAR Portfolio's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances
and certain over-the-counter options may have no markets. As a result, in
certain markets, the STAR Portfolio might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use
of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time, in certain circumstances, they tend to limit any potential gain which
might result from an increase in value of such position.
The loss incurred by the STAR Portfolio in writing options on futures and
entering into futures transactions is potentially unlimited; however, as
described above, the STAR Portfolio will attempt to limit its net loss exposure
resulting from Strategic Transactions entered into for non-hedging purposes to
not more than 1% of its net assets at any one time. Futures markets are highly
volatile and the use of futures may increase the volatility of the STAR
Portfolio's NAV . Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce NAV and the net result may
be less favorable than if the Strategic Transactions had not been utilized.
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GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of the STAR Portfolio's assets in special accounts,
as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or
other instrument at the exercise price. For instance, the STAR Portfolio's
purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the STAR Portfolio
the right to sell such instrument at the option exercise price. A call option,
in consideration for the payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell (if the option
is exercised), the underlying instrument at the exercise price. The STAR
Portfolio may purchase a call option on a security, futures contract, index or
other instrument to seek to protect the STAR Portfolio against an increase in
the price of the underlying instrument that it intends to purchase in the
future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The STAR Portfolio is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by physical
delivery of the underlying security, although in the future cash settlement may
become available. Index options and Eurodollar instruments are cash settled for
the net amount, if any, by which the option is "in-the-money" (i.e., where the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at
the time the option is exercised. Frequently, rather than taking or making
delivery of the underlying instrument through the process of exercising the
option, listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
The STAR Portfolio's ability to close out its position as a purchaser or seller
of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the
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markets for the underlying financial instruments, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The STAR
Portfolio will generally sell (write) OTC options that are subject to a
buy-back provision permitting the STAR Portfolio to require the Counterparty to
sell the option back to the STAR Portfolio at a formula price within seven
days. OTC options purchased by the STAR Portfolio, and portfolio securities
"covering" the amount of the STAR Portfolio's obligation pursuant to an OTC
option sold by it (the cost of the sell-back plus the in-the-money amount, if
any) are subject to the STAR Portfolio's restriction on illiquid securities,
unless determined to be liquid in accordance with procedures adopted by the
Board of Trustees of the Standish Portfolio Trust. For OTC options written with
"primary dealers" pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price. The STAR Portfolio expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the STAR Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the STAR
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the STAR Portfolio's
Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be satisfied. The STAR
Portfolio will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's or Moody's or
an equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the STAR Portfolio's Adviser.
If the STAR Portfolio sells (writes) a call option, the premium that it
receives may serve as a partial hedge, to the extent of the option premium,
against a decrease in the value of the underlying securities or instruments in
its portfolio or will increase the STAR Portfolio's income. The sale (writing)
of put options can also provide income.
The STAR Portfolio may purchase and sell (write) put and call options on
securities, including U.S. Treasury and agency securities and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
OTC markets and on securities indices and futures contracts.
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All calls sold by the STAR Portfolio must be "covered" (i.e., the STAR
Portfolio must own the securities or the futures contract subject to the call)
or must meet the asset segregation requirements described below as long as the
call is outstanding. In addition, the STAR Portfolio may cover a written call
option or put option by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the STAR Portfolio's net exposure on its
written option position. Even though the STAR Portfolio will receive the option
premium to help offset any loss, the STAR Portfolio may incur a loss if the
exercise price is below the market price for the security subject to the call
at the time of exercise. A call sold by the STAR Portfolio also exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the STAR Portfolio to hold a security or instrument
which it might otherwise have sold.
The STAR Portfolio will not sell put options if, as a result, more than 50% of
the STAR Portfolio's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
STAR Portfolio may be required to buy the underlying security at a price above
the market price.
Options on Securities Indices and Other Financial Indices. The STAR Portfolio
may also purchase and sell (write) call and put options on securities indices
and other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the
closing price of the index and the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the STAR Portfolio
may cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio.
GENERAL CHARACTERISTICS OF FUTURES. The STAR Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by the STAR Portfolio are traded on
U.S. exchanges or boards of trade that are licensed and regulated by the
Commodity Futures Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by the STAR Portfolio,
as seller, to deliver to the buyer the
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specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). The purchase of futures contracts
creates a corresponding obligation by the STAR Portfolio, as purchaser, to
purchase a financial instrument at a specific time and price. Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position upon exercise of the option.
The STAR Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the CFTC relating to exclusions from regulation as a
commodity pool operator. Those regulations currently provide that the STAR
Portfolio may use commodity futures and option positions (i) for bona fide
hedging purposes without regard to the percentage of assets committed to margin
and option premiums, or (ii) for other purposes permitted by the CFTC to the
extent that the aggregate initial margin and option premiums required to
establish such non-hedging positions (net of the amount that the positions were
"in the money" at the time of purchase) do not exceed 5% of the NAV of the STAR
Portfolio's portfolio, after taking into account unrealized profits and losses
on such positions. Typically, maintaining a futures contract or selling an
option thereon requires the STAR Portfolio to deposit, with its custodian for
the benefit of a futures commission merchant, or directly with the futures
commission merchant, as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
directly with the futures commission merchant thereafter on a daily basis as
the value of the contract fluctuates. The purchase of an option on financial
futures involves payment of a premium for the option without any further
obligation on the part of the STAR Portfolio. If the STAR Portfolio exercises
an option on a futures contract it will be obligated to post initial margin
(and potential subsequent variation margin) for the resulting futures position
just as it would for any position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction but there can be
no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
COMBINED TRANSACTIONS. The STAR Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions, structured notes and any combination of
futures, options and interest rate transactions ("component transactions")
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the STAR Portfolio's Adviser, it is in the
best interests of the STAR Portfolio to do so. A combined transaction will
usually contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into by the
STAR Portfolio based on its Adviser's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
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SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the STAR Portfolio may enter are interest rate, index and total return swaps
and the purchase or sale of related caps, floors and collars. The STAR
Portfolio expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities that the
STAR Portfolio anticipates purchasing at a later date. Swaps, caps, floors and
collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, the STAR Portfolio will
attempt to limit its net loss exposure resulting from swaps, caps, floors and
collars and other Strategic Transactions entered into for such purposes to not
more than 1% of its net assets at any one time. The STAR Portfolio will not
sell interest rate caps, floors or collars where it does not own securities or
other instruments providing the income stream the STAR Portfolio may be
obligated to pay. Interest rate swaps involve the exchange by the STAR
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement
to swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that
a specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The STAR Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the STAR Portfolio receiving or paying,
as the case may be, only the net amount of the two payments. The STAR Portfolio
will not enter into any swap, cap, floor or collar transaction unless, at the
time of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by
Standard & Poor's or Moody's or has an equivalent rating from an NRSRO or the
Counterparty issues debt that is determined to be of equivalent credit quality
by the STAR Portfolio's Adviser. If there is a default by the Counterparty, the
STAR Portfolio may have contractual remedies pursuant to the agreements related
to the transaction. The swap market has grown substantially in recent years
with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed. Swaps, caps, floors and collars are considered illiquid
for purposes of the STAR Portfolio's policy regarding illiquid securities,
unless it is determined, based upon continuing review of the trading markets
for the specific security, that such security is liquid. The Trustees of the
Standish Portfolio Trust have adopted guidelines and delegated to the STAR
Portfolio's Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. Such Trustees, however, retain
oversight focusing on factors such as valuation, liquidity and availability of
information and they are ultimately responsible for such determinations. The
staff of the Securities and Exchange Commission
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("SEC") currently takes the position that swaps, caps, floors and collars are
illiquid, and are subject to the STAR Portfolio's limitation on investing in
illiquid securities.
EURODOLLAR CONTRACTS. The STAR Portfolio may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts
or options thereon which are linked to the London Interbank Offered Rate
("LIBOR"), although foreign currency-denominated instruments are available from
time to time. Eurodollar futures contracts enable purchasers to obtain a fixed
rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The STAR Portfolio might use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
USE OF SEGREGATED ACCOUNTS. The STAR Portfolio will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The STAR Portfolio will cover Strategic Transactions as
required by interpretive positions of the staff of the SEC. The STAR Portfolio
will not enter into Strategic Transactions that expose the STAR Portfolio to an
obligation to another party unless it owns either (i) an offsetting position in
securities or other options, futures contracts or other instruments or (ii)
cash, receivables or liquid securities with a value sufficient to cover its
potential obligations. The STAR Portfolio may have to comply with any
applicable regulatory requirements for Strategic Transactions, and if required,
will set aside cash and other assets in a segregated account with its custodian
bank (or marked as segregated on the STAR Portfolio's books) in the amount
prescribed. In that case, the STAR Portfolio's custodian would maintain the
value of such segregated account equal to the prescribed amount by adding or
removing additional cash or other assets to account for fluctuations in the
value of the account and the STAR Portfolio's obligations on the underlying
Strategic Transactions. Assets held in a segregated account would not be sold
while the Strategic Transaction is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that segregation of a large
percentage of the STAR Portfolio's assets could impede portfolio management or
the Portfolio's ability to meet redemption requests or other current
obligations.
"WHEN-ISSUED" AND "DELAYED DELIVERY" SECURITIES. Each Portfolio may invest in
securities purchased on a "when-issued" or "delayed delivery" basis. Delivery
and payment for securities purchased on a when-issued or delayed delivery basis
will normally take place 15 to 45 days after the date of the transaction. The
payment obligation and interest rate on the securities are fixed at the time
that a Portfolio enters into the commitment, but interest will not accrue to a
Portfolio until delivery of and payment for the securities. Although each such
Portfolio will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
each such Portfolio may sell the securities before the settlement date if
deemed advisable by their investment adviser or sub-adviser. The Cash, Treasury
and Treasury Plus Portfolios may also, with respect to up to 25% of their total
assets, enter into contracts to purchase securities for a fixed price at a
future date beyond customary settlement time. The STAR Portfolio's limitation
is 10% of its total assets.
Unless the Portfolios have entered into an offsetting agreement to sell the
securities purchased on a "when-issued" or "forward commitment" basis, cash or
liquid obligations with a market value
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equal to the amount of a Portfolio's commitment will be segregated with a
Portfolio's custodian bank. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of a Portfolio's
commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may have a
market value on delivery which is less than the amount paid by a Portfolio.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued", "delayed delivery" and "forward
commitment" securities will fluctuate inversely to changes in interest rates,
i.e., they will appreciate in value when interest rates fall and will decline
in value when interest rates rise.
PORTFOLIO TURNOVER. It is not the policy of the STAR Portfolio to purchase or
sell securities for trading purposes. However, the STAR Portfolio does not
place any restrictions on portfolio turnover and may sell any portfolio
security without regard to the period of time it has been held. The STAR
Portfolio may therefore generally change its portfolio investments at any time
in accordance with its Adviser's appraisal of factors affecting any particular
issuer or market, or relevant economic conditions. The portfolio turnover rate
for the STAR Portfolio is generally not expected to exceed 150% on an annual
basis. A rate of turnover of 100% would occur if the value of the lesser of
purchases and sales of portfolio securities for a particular year equaled the
average monthly value of portfolio securities owned during the year (excluding
short-term securities). A high rate of portfolio turnover (100% or more)
involves a correspondingly greater amount of brokerage commissions and other
costs which must be borne directly by the STAR Portfolio and thus indirectly by
its interestholders. It may also result in the realization of larger amounts of
net short-term capital gains, distributions of which by an interestholder in
the STAR Portfolio that is a regulated investment company are taxable as
ordinary income.
INVESTMENT RESTRICTIONS
The Funds and the Portfolios have adopted the following fundamental policies.
Each of the Fund's and Portfolio's fundamental policies cannot be changed
unless the change is approved by a "vote of the outstanding voting securities"
of a Fund or a Portfolio, as the case may be, which phrase as used herein means
the lesser of (i) 67% or more of the voting securities of a Fund or Portfolio
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of a Fund or Portfolio are present or represented by proxy, or (ii)
more than 50% of the outstanding voting securities of a Fund or Portfolio.
As a matter of fundamental policy, the Cash Portfolio (Series), the Treasury
Portfolio (Series) and the Treasury Plus Portfolio (Series) may not:
(1) purchase any securities that would cause more than 25% of the total
assets of the Portfolio at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to U.S. Government Securities or (for the Cash Portfolio (Series)
and
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the Treasury Plus Portfolio (Series)) bank obligations or repurchase
agreements collateralized by any of such obligations as applicable;
(2) borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions, provided that borrowing
does not exceed an amount equal to 33 1/3% of the current value of the
Portfolio's assets taken at market value, less liabilities, other than
borrowings;
(3) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions);
(4) make loans to any person or firm; provided, however, that the making
of a loan shall not include entering into repurchase agreements, and
provided further that a Portfolio may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of
all securities loaned does not exceed 33 1/3% of the value of a
Portfolio's total assets;
(5) engage in the business of underwriting the securities issued by
others, except that a Portfolio will not be deemed to be engaging in the
business of underwriting with respect to the purchase or sale of
securities subject to legal or contractual restrictions on disposition;
(6) issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940
Act; and
(7) purchase or sell real estate, commodities, or commodity contracts
unless acquired as a result of ownership of securities, and provided
further that a Portfolio may invest in securities backed by real estate
and in financial futures contracts and options thereon.
If any percentage restriction described above for the Cash Portfolio (Series),
Treasury Portfolio (Series) or Treasury Plus Portfolio (Series) is adhered to
at the time of investment, a subsequent increase or decrease in the percentage
resulting from a change in the net assets of the Portfolios (Fund) will not
constitute a violation of the restriction. The above restrictions also apply to
each Fund, with the exception that a Fund may invest all of its investable
assets without limitation in its respective Portfolio.
As a matter of fundamental policy, the STAR Portfolio (Series) may not:
(1) Issue senior securities. For purposes of this restriction, borrowing
money, making loans, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of Trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (Fund's)
investment policies, are not deemed to be senior securities.
(2) Borrow money, except (i) in amounts not to exceed 33 1/3% of the value
of the Portfolio's (Fund's) total assets (including the amount borrowed)
taken at market value from
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banks or through reverse repurchase agreements or forward roll
transactions, (ii) up to an additional 5% of its total assets for
temporary purposes, (iii) in connection with short-term credits as may be
necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Portfolio (Series) may purchase securities on margin to the
extent permitted by applicable law. For purposes of this investment
restriction, investments in short sales, roll transactions, futures
contracts, options on futures contracts, securities or indices and forward
commitments, entered into in accordance with the Portfolio's (Fund's)
investment policies, shall not constitute borrowing.
(3) Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the Portfolio
(Series) may be deemed to be an underwriter under the Securities Act of
1933.
(4) Purchase or sell real estate except that the Portfolio (Series) may
(i) acquire or lease office space for its own use, (ii)invest in
securities of issuers that invest in real estate or interests therein,
(iii) invest in securities that are secured by real estate or interests
therein, (iv) purchase and sell mortgage-related securities and (v) hold
and sell real estate acquired by the Portfolio (Series) as a result of the
ownership of securities.
(5) Purchase or sell commodities or commodity contracts, except the
Portfolio (Series) may purchase and sell options on securities, securities
indices and currency, futures contracts on securities, securities indices
and currency and options on such futures, forward foreign currency
exchange contracts, forward commitments, securities index put or call
warrants and repurchase agreements entered into in accordance with the
Portfolio's (Series') investment policies.
(6) Make loans, except that the Portfolio (Series) (1) may lend portfolio
securities in accordance with the Portfolio's (Series') investment
policies up to 33 1/3% of the Portfolio's (Series') total assets taken at
market value, (2) enter into repurchase agreements, and (3) purchase all
or a portion of an issue of debt securities, bank loan participation
interests, bank certificates of deposit, bankers' acceptances, debentures
or other securities, whether or not the purchase is made upon the
original issuance of the securities.
(7) With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (Series') total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (Series).
(8) Invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
instrumentalities).
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The following restrictions are not fundamental policies and may be changed by
the Trustees of the Standish Portfolio Trust without investor approval in
accordance with applicable laws, regulations or regulatory policy. The STAR
Portfolio (Series) may not:
a. Purchase securities on margin (except that the Portfolio (Series) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
b. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
c. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are illiquid.
e. Purchase additional securities if the Portfolio's (Series') borrowings
exceed 5% of its net assets.
It is expected that not more than 5% of the STAR Portfolio's net assets will be
at risk as a result of investment in inverse floating rate securities.
Notwithstanding any fundamental or non-fundamental policy, the STAR Series may
invest all of its assets (other than assets which are not "investment
securities" (as defined in the 1940 Act) or are excepted by the SEC) in an
open-end investment company with substantially the same investment objective as
the STAR Series.
For the purposes of STAR Portfolio's (Series') fundamental restriction 8, state
and municipal governments and their agencies, authorities and instrumentalities
are not deemed to be industries; telephone companies are considered to be a
separate industry from water, gas or electric utilities; personal credit
finance companies and business credit finance companies are deemed to be
separate industries; and wholly-owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents. Fundamental restriction 8 does not
apply to investments in municipal securities which have been prefunded by the
use of obligations of the U.S. Government or any of its agencies or
instrumentalities. For purposes of fundamental restriction 8, the industry
classification of an asset-backed security is determined by its underlying
assets. For example, certificates for automobile receivables and certificates
for amortizing revolving debts constitute two different industries.
If any percentage restriction described above for the STAR Portfolio (Series)
is adhered to at the time of investment, a subsequent increase or decrease in
the percentage resulting from a change in the value of the Portfolio's
(Series') assets will not constitute a violation of the restriction.
19
<PAGE>
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS
TRUSTEES AND OFFICERS. The names, addresses, dates of birth and principal
occupation(s) during the last five years of the Trustees and officers of the
Trust, the Portfolio Trust and the Standish Portfolio Trust are listed below.
The business address of the Trustees and officers of the Trust and the
Portfolio Trust is 200 Clarendon Street, Boston, Massachusetts 02116. Unless
otherwise noted, the business address of the Trustees and officers of the
Standish Portfolio Trust is One Financial Center, Boston, Massachusetts 02111.
TRUSTEES AND OFFICERS OF THE TRUST
KEVIN J. SHEEHAN, TRUSTEE*, 6/22/51, Director 1990 - present, President June
1992 - present, Chairman and Chief Executive Officer June 1995 - present,
Investors Bank & Trust Company, Chairman and Chief Executive Officer June 1995
- - present, Investors Financial Services Corp.
FRANCIS J. GAUL, JR., TRUSTEE, 9/25/43, Private Investor July 1998 - present,
Director and Principal, Triad Investment Management Company June 1997 - June
1998, Vice President, Triad Investment Management Company (Registered
Investment Adviser) July 1996 - May 1997, Vice President & Resident Manager,
Goldman Sachs & Co. (Investment Banking & Institutional Sales) June 1993 -
January 1996.
EDWARD F. HINES, JR., TRUSTEE, 9/5/45, Partner 1977 - present, Choate, Hall &
Stewart.
THOMAS E. SINTON, TRUSTEE, 8/26/32, Retired, Managing Director, Corporate
Accounting Policy, April 1993 - October 1996 and Consultant, January 1993 -
March 1996, Bankers Trust Company.
GEORGE A. RIO, President, 1/2/55, Executive Vice President, Client Service
Director of Funds Distributor, Inc., April 1998 - present; Senior Vice
President, Senior Key Account Manager for Putnam Mutual Funds, June 1995 March
1998; Director of Business Development for First Data Corporation, May 1994 -
June 1995; Senior Vice President and Manager of Client Services and Director of
Internal Audit at The Boston Company, September 1983 - May 1994.
PAUL J. JASINSKI, Treasurer and Chief Financial Officer, 2/17/47, Managing
Director, Investors Bank & Trust Company, 1990 - present.
SUSAN C. MOSHER, Secretary, 1/29/55, Director, Mutual Fund Administration Legal
Administration, Investors Bank & Trust Company, 1995 - present, Associate
Counsel, 440 Financial Group of Worcester, Inc., 1993 - 1995.
ANDREW S. JOSEF, Assistant Secretary, 2/25/64, Director, Mutual Fund
Administration - Legal Administration, Investors Bank & Trust Company, 1997 -
present, Senior Associate, Sullivan & Worcester LLP, 1995 - 1997, Associate,
Goodwin, Procter & Hoar 1993 - 1995, Associate, Simpson Thacher & Bartlett,
1989 - 1993.
20
<PAGE>
TRUSTEES AND OFFICERS OF THE PORTFOLIO TRUST
KEVIN J. SHEEHAN, TRUSTEE**, 6/22/51, Director since 1990, President June 1992
- - present, Chairman and Chief Executive Officer June 1995 - present, Investors
Bank & Trust Company, Chairman and Chief Executive Officer June 1995 - present,
Investors Financial Services Corp.
FRANCIS J. GAUL, JR., TRUSTEE, 9/25/43, Private Investor July 1998 - present,
Director and Principal, Triad Investment Management Company June 1997 - June
1998, Vice President, Triad Investment Management Company (Registered
Investment Adviser) July 1996 - May 1997, Vice President & Resident Manager,
Goldman Sachs & Co. (Investment Banking & Institutional Sales) June 1993 -
January 1996.
EDWARD F. HINES, JR., TRUSTEE, 9/5/45, Partner 1977 - present, Choate, Hall &
Stewart.
THOMAS E. SINTON, TRUSTEE, 8/26/32, Retired, Managing Director, Corporate
Accounting Policy, April 1993 - October 1996 and Consultant, January 1993 -
March 1996, Bankers Trust Company.
PAUL J. JASINSKI, President, Treasurer and Chief Financial Officer, 2/17/47,
Managing Director, Investors Bank & Trust Company, 1990 - present.
TIMOTHY J. COYNE, Vice President, 5/9/67, Director, Corporate Marketing,
Investors Bank & Trust Company, 1997 - present, Vice President, Corporate
Sales, Dreyfus Corporation, 1995 - 1997, Assistant Vice President, Concord
Financial Corp., 1992 - 1995.
CHRISTOPHER J. QUINN, Assistant Vice President, 5/6/66, Manager, Advisory
Client Services, Investors Bank & Trust Company, 1996 - present, Service
Specialist Mutual Funds, Fleet Bank, 1994 - 1996, Executive Sales Assistant,
Concord Financial Corp., 1993 - 1994.
SUSAN C. MOSHER, Secretary, 1/29/55, Director, Mutual Fund Administration -
Legal Administration, Investors Bank & Trust Company, 1995 - present, Associate
Counsel, 440 Financial Group of Worcester, Inc., 1993 - 1995.
ANDREW S. JOSEF, Assistant Secretary, 2/25/64, Director, Mutual Fund
Administration - Legal Administration, Investors Bank & Trust Company, 1997 -
present, Senior Associate, Sullivan & Worcester LLP, 1995 - 1997, Associate,
Goodwin, Procter & Hoar 1993 - 1995, Associate, Simpson Thacher & Bartlett,
1989 - 1993.
RAYMOND O'NEILL, Assistant Treasurer and Assistant Secretary, 4/12/62, Managing
Director, IBT Trust & Custodial Services (Ireland) LMTD, 1994 - present; Vice
President, Atlantic Corporate Management Limited, 1991 - 1994.
21
<PAGE>
TRUSTEES AND OFFICERS OF THE STANDISH PORTFOLIO TRUST
D. BARR CLAYSON, Vice President and Trustee***, 7/29/35, Vice President and
Managing Director, Standish, Ayer & Wood, Inc.; Chairman of the Board and Vice
President, Standish International Management Company, L.P.
SAMUEL C. FLEMING, Trustee, 9/30/40, Chairman of the Board and Chief Executive
Officer, Decision Resources, Inc.; through 1989, Senior Vice President, Arthur
D. Little. His address is c/o Decision Resources, Inc., 1100 Winter Street,
Waltham, Massachusetts 02154.
BENJAMIN M. FRIEDMAN, Trustee, 8/5/44, William Joseph Maier Professor of
Political Economy, Harvard University. His address is c/o Harvard University,
Cambridge, Massachusetts 02138.
JOHN H. HEWITT, Trustee, 4/11/35, Trustee, The Peabody Foundation; Trustee,
Visiting Nurse Alliance of Vermont and New Hampshire. His address is P.O. Box
307, South Woodstock, Vermont 05071.
EDWARD H. LADD, Vice President and Trustee***, 1/3/38, Chairman of the Board
and Managing Director, Standish, Ayer & Wood, Inc.
CALEB LORING III, Trustee, 11/14/43, Trustee, Essex Street Associates (family
investment trust office); Director, Holyoke Mutual Insurance Company. His
address is c/o Essex Street Associates, P.O. Box 5600, Beverly Farms,
Massachusetts 01915.
RICHARD S. WOOD, President and Trustee***, 5/21/54, Vice President and Managing
Director, (since 1995), Standish, Ayer & Wood, Inc.; Executive Vice President
and Director, Standish International Management Company, L.P.
JAMES E. HOLLIS III, Executive Vice President, 11/21/48, Vice President and
Director, Standish, Ayer & Wood, Inc.
ANNE P. HERRMANN, Vice President and Secretary, 1/26/56, Mutual Fund
Administrator, Standish, Ayer & Wood, Inc.
PAUL G. MARTINS, Vice President and Treasurer, 3/10/56, Vice President of
Finance, Standish, Ayer & Wood, Inc. since October 1996; formerly Senior Vice
President, Treasurer and Chief Financial Officer of Liberty Financial Bank
Group, 1993 - 1995; prior to 1993, Corporate Controller, The Berkeley Financial
Group.
BEVERLY E. BANFIELD, Vice President, 7/6/56, Vice President and Compliance
Officer, Standish, Ayer & Wood, Inc.
LAVINIA B. CHASE, Vice President, 6/4/46, Vice President and Associate
Director, Standish, Ayer & Wood, Inc.
22
<PAGE>
DENISE B. KNEELAND, Vice President, 8/19/51, Senior Operations, Manager,
Standish, Ayer & Wood, Inc. since December 1995; formerly Vice President,
Scudder, Stevens and Clark.
DAVID C. STUEHR, Vice President, 3/1/58, Vice President and Director, Standish,
Ayer & Wood, Inc.
SARAH WALCOTT ABRAMSON, Vice President, 12/9/65, Compliance Administrator,
Standish, Ayer & Wood, Inc.
KATHLEEN M. BROCCOLI, Vice President, 4/13/65, Manager, Portfolio Accounting,
Standish, Ayer & Wood, Inc.
THOMAS J. HANLON, Vice President, 9/25/60, Manager, Trade Settlement and
Pricing, Standish, Ayer & Wood, Inc.
ROSALIND J. LILLO, Vice President, 2/6/38, Broker/Dealer Administrator,
Standish, Ayer & Wood, Inc. (since 1995); Compliance Administrator, New England
Securities Corp.
GIGI K. SZEKELY, Vice President, 5/8/67, Manager, Client Communications,
Standish, Ayer & Wood, Inc.
* Indicates that the Trustee is an "interested person" of the Trust as
defined in the 1940 Act.
** Indicates that the Trustee is an "interested person" of the Portfolio
Trust as defined in the 1940 Act.
*** Indicates that the Trustee is an "interested person" of the Standish
Portfolio Trust as defined in the 1940 Act.
COMPENSATION OF THE TRUSTEES AND OFFICERS. Neither the Trust nor the Portfolio
Trust compensates the Trustees or officers of the Trust and the Portfolio Trust
who are affiliated with Investors Bank or the Distributor. Neither the Trust
nor the Standish Portfolio Trust compensates the Trustees and officers of the
Standish Portfolio Trust who are affiliated with Standish. None of the Trustees
or officers of the Trust or the Portfolio Trust have engaged in any financial
transactions with the Trust or the Portfolio Trust, respectively, during the
fiscal year ended December 31, 1998. None of the Trustees or officers of the
Standish Portfolio Trust have engaged in any financial transactions with the
Standish Portfolio Trust during the fiscal year ended December 31, 1998.
The Trustees of the Portfolio Trust are paid an annual retainer of $10,000,
payable in equal quarterly installments, and a $2,500 meeting fee for each
quarterly meeting attended. Each Fund bears its pro rata allocation of
Trustees' fees paid by its corresponding Portfolio to the Trustees of the
Portfolio Trust. The Trustees of the Trust are paid a $750 meeting fee for each
quarterly meeting attended. The following table reflects the compensation paid
by the Trust, by the Portfolio Trust and by another related open end investment
company, to each Trustee for the fiscal period ended December 31, 1998.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued as Part From Trust and Fund
Name of Trustee From the Trust of Fund's Expenses Complex*
- --------------- -------------- ------------------------ -------------------
Kevin J. Sheehan $0 $0 $0
Francis J. Gaul, Jr. $1,167 $0 $25,000
Edward F. Hines, Jr. $1,167 $0 $25,000
Thomas E. Sinton $1,167 $0 $25,000
</TABLE>
*Fund Complex consists of the Trust, the Portfolio Trust and the Merrimac
Funds, comprising seven series as of December 31, 1998.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 31, 1998, the Standish Short-Term Asset Reserve Fund owned
approximately 99.61% of the outstanding interests of the STAR Portfolio and,
therefore, was deemed to control the STAR Portfolio. As of December 31, 1998,
the Merrimac Cash Fund beneficially owned approximately 84.36% (and was,
therefore, deemed to control the Cash Portfolio) and the Merrimac Cash Series
beneficially owned approximately 14.54% of the outstanding interests of the
Cash Portfolio. As of December 31, 1998, the Merrimac Treasury Series owned
100% of the outstanding interests of the Treasury Portfolio and, therefore, was
deemed to control the Treasury Portfolio. As controlling persons, Standish
Short-Term Asset Reserve Fund, the Merrimac Cash Fund and the Merrimac Treasury
Series each may be able to take actions regarding their corresponding Portfolio
without the consent or approval of other interest holders.
INVESTMENT ADVISORY SERVICES
CASH PORTFOLIO, TREASURY PORTFOLIO AND TREASURY PLUS PORTFOLIO. The Cash
Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio each retain
Investors Bank & Trust Company ("Investors Bank" or the "Adviser") as their
investment adviser. The Investment Adviser Agreement (the "Adviser Agreement")
between Investors Bank and each of the Cash Portfolio, the Treasury Portfolio
and the Treasury Plus Portfolio provides that Investors Bank will manage the
operations of the Cash Portfolio, the Treasury Portfolio and the Treasury Plus
Portfolio, subject to the policies established by the Board of Trustees of the
Trust. Investors Bank also provides office space, facilities, equipment and
personnel necessary to supervise the Cash, Treasury and the Treasury Plus
Portfolios' operations and pays the compensation of each such Portfolio's
officers, employees and directors affiliated with Investors Bank. For a
description of the rate of compensation that the Cash Portfolio, the Treasury
Portfolio and the Treasury Plus Portfolio pay Investors Bank under the Adviser
Agreement, see the current Prospectus. Investors Bank's business address is 200
Clarendon Street, Boston, Massachusetts 02116.
24
<PAGE>
The Board of Trustees of the Portfolio Trust (including a majority of the
Trustees who are not "interested" persons of the Portfolio Trust) last approved
the Adviser Agreement for the Cash Portfolio on October 26, 1998, the Treasury
Portfolio on February 6, 1997 and the Treasury Plus Portfolio on October 26,
1998. The Adviser Agreements each provide that they will continue initially for
two years from their date of execution, and from year to year thereafter as
long as they are approved at least annually (a) by vote of a majority of such
Portfolio's outstanding voting securities or by the Portfolio Trust's Board of
Trustees and (b) by the vote of a majority of the Portfolio Trust's Trustees
who are not parties to the Adviser Agreement or "interested persons" of any
such party. Each Adviser Agreement may be terminated on 60 days' written notice
by either party and will terminate automatically if assigned. Each Adviser
Agreement provides in substance that the Adviser shall not be liable for any
action or failure to act in accordance with its duties thereunder in the
absence of willful misfeasance, bad faith or gross negligence on the part of
the Adviser or of reckless disregard of its obligations thereunder.
Pursuant to an Investment Sub-Adviser Agreement (the "AAM Sub-Adviser
Agreement"), Investors Bank has retained Allmerica Asset Management ("AAM") as
sub-adviser to the Cash Portfolio. AAM is compensated by Investors Bank at no
additional cost to the Cash Portfolio. Subject to the supervision of Investors
Bank and of the Portfolio Trust's Board of Trustees, AAM furnishes to the Cash
Portfolio investment research, advice and supervision and determines what
securities will be purchased, held or sold by the Cash Portfolio. For a
description of the rate of compensation that Investors Bank pays AAM under the
AAM Sub-Adviser Agreement, see the Prospectus. AAM's business address is 440
Lincoln Street, Worcester, Massachusetts 01653.
Pursuant to Investment Sub-Adviser Agreements (the "M&I Sub-Adviser
Agreements"), Investors Bank has retained M&I Investment Management Corp.
("M&I") as sub-adviser to the Treasury Portfolio and the Treasury Plus
Portfolio. M&I is compensated by Investors Bank at no additional cost to the
Treasury Portfolio and the Treasury Plus Portfolio. Subject to the supervision
of Investors Bank and of the Portfolio Trust's Board of Trustees, M&I furnishes
to the Treasury Portfolio and the Treasury Plus Portfolio investment research,
advice and supervision and determines what securities will be purchased, held
or sold by the Treasury Portfolio and the Treasury Plus Portfolio. For a
description of the rate of compensation that Investors Bank pays M&I under the
M&I Sub-Adviser Agreements, see the Prospectus. M&I's business address is 1000
North Water Street, Milwaukee, Wisconsin 53202.
The Cash, Treasury and Treasury Plus Portfolios bear the expenses of their
operations other than those incurred by AAM or M&I, respectively. Among the
other expenses, the Portfolios pay share pricing and shareholder servicing fees
and expenses; custodian fees and expenses; legal and auditing fees and
expenses; expenses of shareholder reports; registration and reporting fees and
expenses; and the Portfolio Trust's Trustees' fees and expenses.
STAR PORTFOLIO. The STAR Portfolio and Standish, Ayer & Wood, Inc. ("Standish")
have entered into an investment advisory agreement (the "Standish Advisory
Agreement") under which Standish serves as investment adviser. Prior to the
close of business on January 1, 1998, Standish managed directly the assets of
the Standish STAR Fund pursuant to an investment advisory agreement. This
agreement was terminated by the Standish STAR Fund on such date subsequent to
the approval by Standish STAR Fund's shareholders on December 17, 1997 to
implement certain changes in the Standish STAR Fund's investment restrictions
which would enable the Standish STAR Fund to invest all of its investable
assets in the newly-created STAR Portfolio. Each of the STAR Fund and the
Standish STAR Fund invests all of its investable assets in the STAR Portfolio
as a separate management investment company.
The following, constituting all of the Directors and all of the shareholders of
Standish, are Standish's controlling persons: Caleb F. Aldrich, Nicholas S.
Battelle, David H. Cameron, Karen K. Chandor, D. Barr Clayson, W. Charles Cook,
Joseph M. Corrado, Richard C. Doll, Dolores S.
25
<PAGE>
Driscoll, Mark A. Flaherty, Maria D. Furman, James E. Hollis III, Raymond J.
Kubiak, Edward H. Ladd, Laurence A. Manchester, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, Thomas P. Sorbo, David C. Stuehr,
Ralph S. Tate, Michael W. Thompson and Richard S. Wood.
For a description of the rate of compensation that the STAR Fund pays Standish
and the services provided by Standish under the Standish Advisory Agreement,
see the Prospectus. Standish's business address is One Financial Center,
Boston, Massachusetts 02111.
Unless terminated as provided below, the Standish Advisory Agreement continues
in full force and effect until December 31, 1999 and from year to year
thereafter, but only for so long as each such continuance is approved annually
(i) by the Trustees of the Standish Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the STAR Portfolio and, in
either event (ii) by vote of a majority of the Trustees of the Portfolio Trust
who are not parties to the Standish Advisory Agreement or "interested persons"
(as defined in the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Standish Advisory
Agreement may be terminated at any time without the payment of any penalty by
vote of the Trustees of the Standish Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the STAR Portfolio or by
Standish, on sixty days' written notice to the other party. The Standish
Advisory Agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions for
the STAR Fund and the STAR Portfolio, Standish and the Standish Portfolio Trust
have each adopted restrictions on personal securities trading by personnel of
Standish and its affiliates. These restrictions include: pre-clearance of all
personal securities transactions and a prohibition of purchasing initial public
offerings of securities. These restrictions are a continuation of the basic
principle that the interests of the STAR Fund and its shareholders, and the
STAR Portfolio and its investors, come before those of Standish and its
employees.
The STAR Portfolio bears expenses of its operations other than those incurred
by Standish. Among the other expenses, the Portfolio pays share pricing and
expenses; custodian fees and expenses; legal and auditing fees and expenses;
expenses of prospectuses, statements of additional information and shareholder
reports; registration and reporting fees and expenses; and Standish Portfolio
Trust's Trustees' fees and expenses.
DISTRIBUTOR
The Premium, Institutional and Investment Class shares of the Funds are
continuously distributed by Funds Distributor, Inc. (the "Distributor")
pursuant to a Distribution Agreement with the Trust dated June 1, 1998. The
Distributor makes itself available to receive purchase orders for the Funds'
shares. Pursuant to the Distribution Agreement, the Distributor has agreed to
use its best efforts to obtain orders for the continuous offering of the Funds'
shares. The Distributor receives no commissions or other compensation from the
Funds for its services, but receives compensation from Investors
26
<PAGE>
Bank for services it performs in acting as the Funds' Distributor.
The Distribution Agreement shall continue in effect with respect to the Funds
until two years after its execution and for successive periods of one year
thereafter only if it is approved at least annually thereafter (i) by a vote of
the holders of a majority of the Trust's outstanding shares or by the Trustees
of the Trust or (ii) by a vote of a majority of the Trustees of the Trust who
are not "interested persons" (as defined by the 1940 Act) of the parties to the
Distribution Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement will terminate
automatically if assigned by either party thereto and is terminable at any time
without penalty on not more than 60 days' written notice to the other party.
The offices of the Distributor are located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
The Board of Trustees of the Trust has adopted a Plan of Distribution (the
"Distribution Plan") under Rule 12b-1 of the 1940 Act with respect to the
Investment Class of shares of each Fund after having concluded that there is a
reasonable likelihood that the Distribution Plan will benefit the Funds and
their shareholders. The Distribution Plan provides that the Distribution Agent
(defined therein) shall receive a fee from each Fund at an annual rate not to
exceed 0.25% of the average daily net assets of such Fund attributable to
shareholders who are clients of the Distribution Agent, plus reimbursement of
direct out of pocket expenditures incurred in connection with the offer or sale
or shares, including expenses relating to the preparation, printing and
distribution of sales literature and reports.
The Distribution Plan will initially be effective for one year from its
effective date. Thereafter, the Distribution Plan shall continue in effect only
if such continuance is specifically approved at least annually by a vote of
both a majority of the Board of Trustees of the Trust and a majority of the
Trustees of the Trust who are not "interested persons" of the Trust (the
"Disinterested Trustees.") The Distribution Plan may be terminated with respect
to a Fund at any time by a vote of a majority of the Disinterested Trustees, or
by a vote of a majority of the outstanding voting shares of such Fund.
The Board of Trustees of the Trust have also adopted a Shareholder Servicing
Plan (the "Servicing Plan") with respect to the Institutional Class and
Investment Class shares of each Fund after having concluded that there is a
reasonable likelihood that the Servicing Plan will benefit the Funds and their
shareholders. The Servicing Plan provides that the Shareholder Servicing Agent
shall receive a fee from each Fund at an annual rate not to exceed 0.25% of the
average daily net assets of such Fund.
The Servicing Plan will initially be effective for one year from its effective
date. Thereafter, the Servicing Plan continues in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Board of Trustees of the Trust and a majority of the Qualified Trustees. The
Servicing Plan requires that at least quarterly, the Treasurer of the Trust
provide to the Trustees of the Trust and that the Trustees review a written
report of the amounts expended pursuant to the Servicing Plan and the purposes
for which such expenditures were made. The Servicing Plan further provides that
the selection and nomination of the Trust's Qualified Trustees is committed to
the discretion of the Trust's disinterested Trustees then in office. The
27
<PAGE>
Servicing Plan may be terminated at any time by a vote of a majority of the
Qualified Trustees, or by a vote of a majority of the outstanding voting shares
of such Fund. The Plan may not be amended to increase materially the amount of
a Fund's permitted expenses thereunder without the approval of a majority of
the outstanding voting securities of the affected Class of such Fund and may
not be materially amended in any case without a vote of the majority of both
the Trust's Trustees and the Trust's Qualified Trustees.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus. The
Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during
which the New York Stock Exchange ("NYSE") and the Federal Reserve Bank ("Fed")
are closed (other than customary weekend or holiday closings) or trading on the
exchange is restricted; (ii) for any period during which an emergency exists as
a result of which disposal by the Fund of securities owned by it or
determination by the Fund of the value of its net assets is not reasonably
practicable; or (iii) for such other periods as the SEC may permit for the
protection of shareholders of the Fund.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust, with respect to the STAR
Series, may make payment wholly or partly in portfolio securities, in
conformity with a rule of the SEC. Portfolio securities paid upon redemption of
Fund shares will be valued at their then current market value. An investor may
incur brokerage costs in converting portfolio securities received upon
redemption to cash. The Portfolios have advised the Trust that the Portfolios
will not redeem in-kind except in circumstances in which a Fund is permitted to
redeem in-kind or except in the event a Fund completely withdraws its interest
from a Portfolio.
PORTFOLIO TRANSACTIONS
CASH PORTFOLIO, TREASURY PORTFOLIO AND TREASURY PLUS PORTFOLIO. Purchases and
sales of securities for the Cash, Treasury and Treasury Plus Portfolios usually
are principal transactions. Securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
are no brokerage commissions paid for such purchases. The Cash Portfolio,
Treasury Portfolio and the Treasury Plus Portfolio do not anticipate paying
brokerage commissions. Any transaction for which the Cash Portfolio, Treasury
Portfolio or the Treasury Plus Portfolio pays a brokerage commission will be
effected at the best price and execution available. Purchases from underwriters
of securities include a commission or concession paid by the issuer to the
underwriter and purchases from dealers serving as market makers include the
spread between the bid and asked price.
Allocations of transactions, including their frequency, to various dealers is
determined by the respective Sub-Advisers in their best judgment and in a
manner deemed to be in the best interest of each of the Cash Series, Treasury
Series and the Treasury Plus Series and the other investors in the Cash
Portfolio, Treasury Portfolio or the Treasury Plus Portfolio rather than by any
28
<PAGE>
formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
Investment decisions for the Cash Portfolio, Treasury Portfolio and the
Treasury Plus Portfolio will be made independently from those for any other
account or investment company that is or may in the future become managed by
the Sub-Advisers. If, however, the Cash Portfolio, Treasury Portfolio or the
Treasury Plus Portfolio and other accounts managed by its Sub-Adviser are
contemporaneously engaged in the purchase or sale of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by the Cash Portfolio, Treasury Portfolio or the Treasury Plus
Portfolio or the size of the position obtainable for the Cash Portfolio,
Treasury Portfolio or the Treasury Plus Portfolio. In addition, when purchases
or sales of the same security for the Cash Portfolio, Treasury Portfolio or the
Treasury Plus Portfolio and for other accounts managed by their Sub-Adviser
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantages available to large denomination purchases or
sales.
STAR PORTFOLIO. Standish is responsible for placing the STAR Portfolio's
portfolio transactions and will do so in a manner deemed fair and reasonable to
the STAR Portfolio and not according to any formula. The primary consideration
in all portfolio transactions will be prompt execution of orders in an
efficient manner at the most favorable price. In selecting broker-dealers and
in negotiating commissions, Standish will consider the firm's reliability, the
quality of its execution services on a continuing basis and its financial
condition. If Standish determines in good faith that the amount of commissions
charged by a broker is reasonable in relation to the value of the brokerage and
research services provided by such broker, the STAR Portfolio may pay
commissions to such broker in an amount greater than the amount another firm
may charge. Research services may include (i) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (ii) furnishing seminars, information, analyses and reports
concerning issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic factors and
trends, portfolio strategy, access to research analysts, corporate management
personnel, industry experts and economists, comparative performance evaluation
and technical measurement services and quotation services, and products and
other services (such as third party publications, reports and analysis, and
computer and electronic access, equipment, software, information and
accessories that deliver, process or otherwise utilize information, including
the research described above) that assist Standish in carrying out its
responsibilities and (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). Research
services furnished by firms through which the STAR Portfolio effects its
securities transactions may be used by Standish in servicing other accounts;
not all of these services may be used by Standish in connection with the STAR
Portfolio. The investment advisory fee paid by the STAR Portfolio under the
Standish Advisory Agreement will not be reduced as a result of Standish's
receipt of research services.
Standish also places portfolio transactions for other advisory accounts.
Standish will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or
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sell securities for the STAR Portfolio and another advisory account. In some
cases, this procedure could have an adverse effect on the price or the amount
of securities available to the STAR Portfolio. In making such allocations, the
main factors considered by Standish will be the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and opinions of the persons responsible for
recommending the investment. To the extent permitted by law, securities to be
sold or purchased for STAR Portfolio may be aggregated with those to be sold or
purchased for other investment clients of Standish and Standish's personnel in
order to obtain best execution.
Because most of the STAR Portfolio's securities transactions will be effected
on a principal basis involving a "spread" or "dealer mark-up," the Portfolio
does not expect to pay any brokerage commissions.
NET ASSET VALUE DETERMINATION
Each Fund's NAV is calculated each day on which both the NYSE and the New York
Federal Reserve Bank are open (a "Business Day"). Currently, the NYSE is not
open on weekends, New Year's Day, Martin Luther King Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The New York Federal Reserve Bank is not open on weekends, the
holidays listed above and on Columbus Day and Veterans' Day. The NAV of the
Cash Series and the Treasury Plus Series' shares is determined once each
Business Day as of 4:00 p.m. (ET). The NAV of the Treasury Series' shares is
determined once each Business Day as of 2:00 p.m. (ET). The NAV of the STAR
Series' shares is determined once each Business Day as of the close of trading
on the NYSE (normally 4:00 p.m. (ET).
The NAV of each Fund is computed by dividing the value of all securities and
other assets of each Fund (substantially all of which will be represented by
such Fund's interest in its corresponding Portfolio) less all liabilities, by
the number of Fund shares outstanding, and adjusting to the nearest cent per
share. Expenses and fees of each Fund are accrued daily and taken into account
for the purpose of determining NAV.
The value of each Portfolio's net assets (i.e., the value of its securities and
other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the NAV per share of its
corresponding Fund is determined. Each investor in a Portfolio may add to or
reduce its investment in such Portfolio on each Business Day. As of 4:00 p.m.
(ET), for the STAR Portfolio on each Business Day, the value of each investor's
interest in the STAR Portfolio will be determined by multiplying the NAV of
such Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the STAR Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the STAR
Portfolio will then be recomputed as the percentage equal to the fraction (i)
the numerator of which is the value of such investor's investment in the STAR
Portfolio as of 4:00 p.m. (ET) for the STAR Portfolio on such
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day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the STAR Portfolio effected on such
day, and (ii) the denominator of which is the aggregate NAV of the Portfolio as
of 4:00 p.m. (ET) (on each day the NYSE is open for trading, for the STAR
Portfolio) on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in the aggregate investments in the STAR Portfolio
by all investors in the STAR Portfolio. The percentage so determined will then
be applied to determine the value of the investor's interest in the STAR
Portfolio as of 4:00 p.m. (ET), for the STAR Portfolio on the following
Business Day.
The following is a description of the procedures used by each Portfolio in
valuing its assets.
CASH PORTFOLIO, TREASURY PORTFOLIO AND TREASURY PLUS PORTFOLIO. The investment
securities in the Cash Portfolio, the Treasury Portfolio and the Treasury Plus
Portfolio are valued based upon the amortized cost method which involves
valuing a security at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium. Although the amortized cost method
provides consistency in valuation, it may result in periods during which the
stated value of a security is higher or lower than the price the Cash
Portfolio, Treasury Portfolio or Treasury Plus Portfolio would receive if the
security were sold. This method of valuation is used in order to stabilize the
NAV of shares of the Cash Series, the Treasury Series or the Treasury Plus
Series at $1.00; however, there can be no assurance that the Cash Series, the
Treasury Series or the Treasury Plus Series' NAV will always remain at $1.00
per share.
STAR PORTFOLIO. Securities that are fixed income securities (other than money
market instruments) for which accurate market prices are readily available are
valued at their current market value on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities.
Securities not listed on an exchange or national securities market, certain
mortgage-backed and asset-backed securities and securities for which there were
no reported transactions are valued at the last quoted bid prices. Fixed income
securities for which accurate market prices are not readily available and all
other assets are valued at fair value as determined in good faith by Standish
in accordance with procedures approved by the Trustees of the Standish
Portfolio Trust, which may include the use of yield equivalents or matrix
pricing.
Money market instruments with less than sixty days remaining to maturity when
acquired by the STAR Portfolio are valued on an amortized cost basis unless the
Trustees determine that amortized cost does not represent fair value. If the
STAR Portfolio acquires a money market instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon the value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value.
The Board of Trustees of the Standish Portfolio Trust has approved determining
the current market value of securities with one year or less remaining to
maturity on a spread basis which will be employed in conjunction with the
periodic use of market quotations. Under the spread process, Standish
determines in good faith the current market value of these portfolio securities
by comparing their quality, maturity and liquidity characteristics to those of
United States
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Treasury bills.
CAPITAL STOCK AND OTHER SECURITIES
Each Fund is a diversified investment series of the Trust, an unincorporated
business trust organized under the laws of the State of Delaware pursuant to
Master Trust Agreement dated March 30, 1998 and amended on October 26, 1998 and
registered as an open-end management investment company under the 1940 Act.
Under the Master Trust Agreement, the Trustees of the Trust have authority to
issue an unlimited number of shares of beneficial interest, par value $0.001
per share, of each Fund. The Master Trust Agreement authorizes the Board of
Trustees to divide the shares into any number of classes or series, each class
or series having such designations, powers, preferences, rights,
qualifications, limitations and restrictions, as shall be determined by the
Board subject to the 1940 Act and other applicable law. The shares of any such
additional classes or series might therefore differ from the shares of the
present class and series of capital stock and from each other as to
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption, subject to applicable law, and might thus be superior or inferior
to the other classes or series in various characteristics.
The Trust generally is not required to hold meetings of its shareholders. Under
the Master Trust Agreement, however, shareholder meetings will be held in
connection with the following matters: (1) the election or removal of Trustees
if a meeting is called for such purpose; (2) the adoption of any investment
advisory contract; (3) any amendment of the Master Trust Agreement (other than
amendments changing the name of the Trust, supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision thereof); and (4) such additional matters as may be required by law,
the Master Trust Agreement, the By-laws of the Trust or any registration of the
Trust with the SEC or any state, or as the Trust's Trustees may consider
necessary or desirable. The shareholders also would vote upon changes in
fundamental investment objectives, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing Trustees and until the election and qualification of
his successor or until such Trustee sooner dies, resigns or is removed by a
vote of two-thirds of the shares entitled to vote, or a majority of the
Trustees. In accordance with the 1940 Act (i) the Trust will hold a shareholder
meeting for the election of Trustees at such time as less than a majority of
the Trustees have been elected by shareholders, and (ii) if, as a result of a
vacancy in the Board of Trustees, less than two-thirds of the Trustees have
been elected by the shareholders, that vacancy will be filled only by a vote of
the shareholders. A shareholders' meeting shall be held for the purpose of
voting upon the removal of a Trustee upon the written request of the holders of
not less than 10% of the outstanding shares. Upon the written request of ten or
more shareholders who have been such for at least six months and who hold
shares constituting at least 1% of the outstanding shares of a Fund stating
that such shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to consider
removal of a Trustee, the Trust has undertaken to disseminate appropriate
materials at the expense of the requesting shareholders.
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The Master Trust Agreement provides that the presence at a shareholder meeting
in person or by proxy of at least 30% of the shares entitled to vote on a
matter shall constitute a quorum. Thus, a meeting of shareholders of the Trust
could take place even if less than a majority of the shareholders were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority
of a quorum, such as the election of Trustees and ratification of the selection
of auditors. Some matters requiring a larger vote under the Master Trust
Agreement, such as termination or reorganization of the Trust and certain
amendments of the Master Trust Agreement, would not be affected by this
provision; nor would matters which under the 1940 Act require the vote of a
"majority of the outstanding voting securities" as defined in the 1940 Act.
The Master Trust Agreement specifically authorizes the Board of Trustees to
terminate the Trust (or any series Fund thereof) by notice to the shareholders
without shareholder approval. The Board of Trustees may by amendment to the
Master Trust Agreement add to, delete, replace or otherwise modify any
provisions relating to any series or class, provided that before adopting any
such amendment without shareholder approval, the Board of Trustees determined
that it was consistent with the fair and equitable treatment of all
shareholders and, if shares have been issued, shareholder approval shall be
required to adopt any amendments which would adversely affect to a material
degree the rights and preferences of the shares of any series or class.
Each share of a Fund has equal voting rights with every other share of a Fund,
and all shares of a Fund vote as a single group except where a separate vote of
any class is required by the 1940 Act, the laws of the State of Delaware, the
Master Trust Agreement or the By-Laws, or as the Board may determine in its
sole discretion. Where a separate vote is required with respect to one or more
classes, then the shares of all other classes vote as a single class, provided
that, as to any matter which does not affect the interest of a particular
class, only the holders of shares of the one or more affected classes is
entitled to vote.
The Cash Portfolio, the Treasury Portfolio and the Treasury Plus Portfolio are
each a series or sub-trust of the Portfolio Trust, a common law trust organized
under New York law on October 30, 1996, registered as an open-end management
investment company under the 1940 Act. The STAR Portfolio is a series of the
Standish Portfolio Trust which, like the Trust and the Portfolio Trust, is an
open-end management investment company registered under the 1940 Act. The
Standish Portfolio Trust was organized as a master trust fund under the laws of
the State of New York on January 18, 1996.
Interests in each Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio Trust and the Standish Portfolio Trust normally will not hold
meetings of holders of such interests except as required under the 1940 Act.
The Portfolio Trust and the Standish Portfolio Trust would be required to hold
a meeting of holders in the event that at any time less than a majority of its
Trustees holding office had been elected by holders. The Trustees of the
Portfolio Trust and the Standish Portfolio Trust continue to hold office until
their successors are elected and have qualified. Holders holding a specified
percentage of interests in a Portfolio may call a meeting of holders in such
Portfolio
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for the purpose of removing any Trustee. A Trustee of the Portfolio Trust or
the Standish Portfolio Trust may be removed upon a majority vote of the
interests held by holders in the Portfolio Trust or the Standish Portfolio
Trust qualified to vote in the election. The 1940 Act requires the Portfolio
Trust and the Standish Portfolio Trust to assist its holders in calling such a
meeting. Upon liquidation of a Portfolio, holders in a Portfolio would be
entitled to share pro rata in the net assets of the Portfolio available for
distribution to holders. Each holder in a Portfolio is entitled to a vote in
proportion to its percentage interest in such Portfolio.
TAXATION
Each Fund is treated as a separate entity for accounting and tax purposes. Each
Fund will elect (when it files its initial federal tax return) to be treated
and to qualify as a "regulated investment company" ("RIC") under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), and intends to
continue to so qualify in the future. As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions, and the diversification of its assets, each Fund
will not be subject to Federal income tax on its investment company taxable
income (i.e., all taxable income, after reduction by deductible expenses, other
than its "net capital gain," which is the excess, if any, of its net long-term
capital gain over its net short-term capital loss) and net capital gain which
are distributed to shareholders in accordance with the timing and other
requirements of the Code.
Each Portfolio is treated as a partnership for federal income tax purposes. As
such, a Portfolio is not subject to federal income taxation. Instead, a Fund
must take into account, in computing its federal income tax liability (if any),
its share of the Portfolio's income, gains, losses, deductions, credits and tax
preference items, without regard to whether it has received any cash
distributions from its corresponding Portfolio. Because a Fund invests its
assets in its corresponding Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements in order for its
corresponding Fund to satisfy them. Each Portfolio will allocate at least
annually among its investors, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. A Portfolio will make
allocations to its corresponding Fund in a manner intended to comply with the
Code and applicable regulations and will make moneys available for withdrawal
at appropriate times and in sufficient amounts to enable the Fund to satisfy
the tax distribution requirements that apply to the Fund and that must be
satisfied in order to avoid Federal income and/or excise tax on the Fund. For
purposes of applying the requirements of the Code regarding qualification as a
RIC, each Fund will be deemed (i) to own its proportionate share of each of the
assets of its corresponding Portfolio and (ii) to be entitled to the gross
income of the Portfolio attributable to such share.
Each Fund will be subject to a 4% non-deductible federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a
timely basis in accordance with annual minimum distribution requirements. Each
Fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by a
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Fund during October, November or December but paid during the following
January. Such distributions will be taxable to taxable shareholders as if
received on December 31 of the year the distributions are declared, rather than
the year in which the distributions are received.
At the discretion of the officers of a Fund, each Fund will distribute net
realized capital gains. For federal income tax purposes, a Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to a Fund and, as noted above, would not
be distributed as such to shareholders.
If the STAR Portfolio invests in zero coupon securities, certain increasing
rate or deferred interest securities or, in general, other securities with an
original issue discount (or with market discount if an election is in effect to
include market discount in income currently), the Portfolio must accrue income
on such investments prior to the receipt of the corresponding cash payments.
However, the STAR Series must distribute, at least annually, all or
substantially all of its net income, including its distributive share of such
income accrued by the STAR Portfolio, to shareholders to qualify as a regulated
investment company under the Code and avoid federal income and excise taxes.
Therefore, the STAR Portfolio may have to dispose of its portfolio securities
under disadvantageous circumstances to generate cash, or may have to leverage
itself by borrowing the cash, to enable the STAR Series to satisfy the
distribution requirements.
Limitations imposed by the Code on regulated investment companies may restrict
the STAR Portfolio's ability to enter into futures, options or currency forward
transactions.
Certain options or futures transactions undertaken by the STAR Portfolio may
cause the STAR Series to recognize gains or losses from marking to market even
though the STAR Portfolio's positions have not been sold or terminated and
affect the character as long-term or short-term and timing of some capital
gains and losses realized by the Portfolio and allocable to the Fund.
Additionally, the STAR Portfolio (and STAR Series) may be required to recognize
gain if an option, future, forward contract, short sale, swap or other
strategic transaction that is not subject to the mark to market rules is
treated as a "constructive sale" of an "appreciated financial position" held by
the Portfolio under Section 1259 of the Code. Any net mark-to-market gains
and/or gains from constructive sales may also have to be distributed by the
STAR Series to satisfy the distribution requirements referred to above even
though no corresponding cash amounts may concurrently be received, possibly
requiring the disposition of portfolio securities or borrowing to obtain the
necessary cash. Also, certain losses on transactions involving options, futures
or forward contracts and/or offsetting or successor positions may be deferred
rather than being taken into account currently in calculating the STAR Series'
taxable income or gain. Certain of the applicable tax rules may be modified if
the STAR Portfolio is eligible and chooses to make one or more of certain tax
elections that may be available. These transactions may affect the amount,
timing and character of the STAR Series' distributions to shareholders. The
STAR Series will take into account the special tax rules applicable to options,
futures, forward contracts and constructive sales in order to minimize any
potential adverse tax consequences.
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The Federal income tax rules applicable to dollar rolls, certain structured or
hybrid securities, interest rate swaps, caps, floors and collars, and possibly
other investments or transactions are unclear in certain respects, and the STAR
Portfolio will account for these instruments in a manner that is intended to
allow the STAR Series and other similar investors to qualify as RICs. Due to
possible unfavorable consequences under present tax law, the STAR Portfolio
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduit ("REMICs"), although it may acquire "regular"
interests in REMICs.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Prospectus whether taken in shares or in cash. Distributions,
if any, in excess of E&P will constitute a return of capital, which will first
reduce an investor's tax basis in Fund shares and thereafter (after such basis
is reduced to zero) will generally give rise to capital gains. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the amount of cash they would have received had they elected to receive the
distributions in cash, divided by the number of shares received. As a result of
the enactment of the Taxpayer Relief Act of 1997 (the "1997 TRA") on August 5,
1997, gain recognized after May 6, 1997 from the sale of a capital asset is
taxable to individual (noncorporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the
asset, the federal income tax bracket of the taxpayer, and the dates the asset
was acquired and/or sold. The Treasury Department has issued guidance under the
1997 TRA that (subject to possible modification by any "technical corrections"
that may be enacted) will enable the Funds to pass through to their
shareholders the benefits of the capital gains tax rates contained in the 1997
TRA. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
It is anticipated that, due to the nature of each Portfolio's investments, no
portion of any Fund's distributions will generally qualify for the dividends
received deduction. A Fund's distributions to its corporate shareholders would
potentially qualify in their hands for the corporate dividends received
deduction, subject to certain holding period requirements and limitations on
debt financing under the Code, only to the extent the Fund was allocated
dividend income of its corresponding Portfolio from stock investments in U.S.
domestic corporations.
At the time of an investor's purchase of STAR Series shares, a portion of the
purchase price may be attributable to undistributed realized or unrealized
appreciation in the STAR Series' share of the STAR Portfolio's portfolio.
Consequently, subsequent distributions by the STAR Series on such shares from
such appreciation may be taxable to such investor even if the NAV of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions economically represent a
return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the STAR Series in a
transaction that is treated as a sale for tax purposes, a shareholder may
realize a taxable gain or loss, depending upon the difference between the
redemption proceeds and the shareholder's tax basis in his shares. Such gain or
loss will generally be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands. Any loss realized on a redemption
may be disallowed to the
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extent the shares disposed of are replaced with other shares of the STAR Series
within a period of 61 days beginning 30 days before and ending 30 days after
the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares. Shareholders should consult
their own tax advisers regarding their particular circumstances to determine
whether a disposition of Fund shares is properly treated as a sale for tax
purposes, as is assumed in the foregoing discussion. Also, future Treasury
Department regulations issued to implement the 1997 TRA may contain rules for
determining different tax rates applicable to sales of Fund shares held for
more than one year, more than 18 months, and (for certain sales after the year
2000 or the year 2005) more than five years. These regulations may also modify
some of the provisions described above.
Dividends and certain other distributions may be subject to "backup
withholding" of federal income tax at a 31% rate for shareholders who fail to
provide required taxpayer identification numbers or related certifications,
provide incorrect information, or are otherwise subject to such withholding.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions and
certain prohibited transactions, is accorded to accounts maintained as
qualified retirement plans. Shareholders should consult their tax adviser for
more information.
The STAR Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to any investments in foreign securities, and
the STAR Series does not expect to pass its share of such taxes or any related
deductions or credits through to its shareholders. Foreign exchange gains and
losses may be recognized by the STAR Portfolio in connection with hybrid or
structured securities or Strategic Transactions in which its return is
dependent upon changes in the value of a foreign currency. Such gains or losses
may be subject in particular cases to Section 988 of the Code, which generally
would cause them to be treated as ordinary income and losses and could affect
the amount, timing and character of the STAR Series' distributions to its
shareholders.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to any foreign
investors (who may be subject to withholding or other taxes) or certain other
classes of investors, such as tax-exempt entities, insurance companies, and
financial institutions. Dividends, capital gain distributions, and ownership of
or gains realized on the redemption (including an exchange) of Fund shares may
also be subject to state and local taxes. A state income (and possibly local
income and/or intangible property) tax exemption is generally available to the
extent, if any, the Fund's distributions are derived from interest on (or, in
the case of intangible property taxes, the value of its assets is attributable
to) investments in certain U.S. Government Securities, provided in some states
that certain thresholds for holdings of such
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obligations and/or reporting requirements are satisfied. Shareholders should
consult their tax advisers regarding the applicable requirements in their
particular states, including the effect, if any, of the Fund's indirect
ownership (through the Portfolio) of any such obligations, the Federal, and any
other state or local, tax consequences of ownership of shares of, and receipt
of distributions from, the Fund in their particular circumstances.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, from time to time, the Cash Series, the
Treasury Series and the Treasury Plus Series may quote their "yield" and
"effective yield" and the STAR Series may quote certain "total return,"
"yield" and "yield-to-maturity" information in advertisements, reports and
other communications to shareholders and compare their performance figures to
those of other funds or accounts with similar objectives and to relevant
indices. Such performance information will be calculated as described below.
Yield quotations are expressed in annualized terms and may be quoted on a
compounded basis.
YIELD
The current yield for the Cash Series, the Treasury Series and the Treasury
Plus Series is computed by (a) determining the net change in the value of a
hypothetical pre-existing account in the Fund having a balance of one share at
the beginning of a seven calendar day period for which yield is to be quoted;
(b) dividing the net change by the value of the account at the beginning of the
period to obtain the base period return; and (c) annualizing the results (i.e.,
multiplying the base period return by 365/7).
The STAR Series' yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)(6) - 1]
- -----------------------------
CD
Where: A=interest earned during the period; B=net expenses accrued for the
period; C=the average daily number of shares outstanding during the period that
were entitled to receive dividends; D=the maximum offering price (net asset
value) per share on the last day of the period.
EFFECTIVE YIELD
In addition, the Cash Series, the Treasury Series and the Treasury Plus Series
may calculate a
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compound effective annualized yield by determining the net change in the value
of a hypothetical pre-existing account in the Fund having a balance of one
share at the beginning of a seven calendar day period for which yield is to be
quoted according to the following formula:
Effective Yield = [( Base Period return +1 ) (365/7 exponentional power)] - 1
(i.e., adding 1 to the base period return (calculated as described above),
raising the sum to a power equal to 365/7 and subtracting 1.)
The net change in the value of the account reflects the value of additional
shares, but does not include realized gains and losses or unrealized
appreciation and depreciation.
TOTAL RETURN
The average annual total return of the STAR Series for a period is computed by
subtracting the NAV per share at the beginning of the period from the NAV per
share at the end of the period (after adjusting for the reinvestment of any
income dividends and capital gain distributions), and dividing the result by
the NAV per share at the beginning of the period. In particular, the STAR
Series' average annual total return ("T") is computed by using the redeemable
value at the end of a specified period of time ("ERV") of a hypothetical
initial investment of $1,000 ("P") over a period of time ("n") according to the
formula P(1+T)n=ERV.
The STAR Series may also quote non-standardized yield, such as yield-to-
maturity ("YTM"). YTM represents the rate of return an investor will receive if
a long-term, interest bearing investment, such as a bond, is held to its
maturity date. YTM does not take into account purchase price, redemption value,
time to maturity, coupon yield and the time between interest payments.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the STAR Portfolio accounts
for gain or loss attributable to actual monthly pay downs as an increase or
decrease to interest income during the period. In addition, the STAR Portfolio
may elect (i) to amortize the discount or premium remaining on a security,
based on the cost of the security, to the weighted average maturity date, if
such information is available, or to the remaining term of the security, if the
weighted average maturity date is not available, or (ii) not to amortize the
discount or premium remaining on a security.
In addition to average annual return quotations, the STAR Series may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis. The STAR Series may also from time to time
advertise total return on a cumulative, average, year-by-year or other basis
for various specified periods by means of quotations, charts, graphs or
schedules.
Past performance quotations should not be considered as representative of any
Fund's performance for any specified period in the future. The Funds'
performance may be compared in sales literature to the performance of other
mutual funds having similar objectives or to standardized indices or other
measures of investment performance. In particular, the STAR
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<PAGE>
Series may compare its performance to The IBC/Donoghue Money Market Average/All
Taxable Index, which is generally considered to be representative of the
performance of domestic, taxable money market funds, and the One Year Treasury
Bills. However, the average maturity of the STAR Series' portfolio is longer
than that of a money market fund and, unlike a money market fund, the NAV of
the STAR Series' shares may fluctuate.
Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare a Fund's past performance to that of other mutual
funds and investment products. Of course, past performance is not a guarantee
of future results.
Each Fund is newly organized and has limited performance history. However,
another fund in the Standish Group of Funds currently invests all of its
investable assets in the STAR Portfolio. This fund, which has substantially the
same investment objective, policies and restrictions as the STAR Portfolio and
the STAR Series. This fund is referred to in this Statement of Additional
Information as a "Corresponding Fund." In accordance with positions expressed
by the staff of the SEC, the STAR Series has adopted the performance record of
the corresponding fund for periods prior to the STAR Series' commencement of
operations. Any quotation of performance data of the STAR Series relating to
these periods will include the performance record for the Corresponding Fund
for these periods. However, because the STAR Series incurs a service fee
payable at the annual rate equal to up to 0.25% of the Fund's average daily net
assets, which service fee is not incurred by the Corresponding Fund, such
quotation of performance will be adjusted downward to reflect the imposition of
such service fee. In addition, to the extent that the net assets of the STAR
Series are lower than the net assets of the Corresponding Fund, fixed expenses
incurred by the STAR Series would be higher as a percentage of average net
assets than for the corresponding fund. See "Investment Advisory Services" and
"Distributor" in this SAI for a description of the STAR Series' expenses. The
Corresponding Fund's performance record adopted by the STAR Series has not been
adjusted to reflect any higher relative expenses, other than the service fees,
expected to be incurred by the STAR Series. The STAR Series' performance would
be lower if adjusted to reflect any higher relative additional expenses.
The Corresponding Fund's average annual total return for the one-, five- and
ten-year (or life-of-the-Fund, if shorter) periods ended on December 31, 1997
(adjusted to reflect the imposition of a service fee, distribution fee and
other estimated expenses of the STAR Series as discussed above) were as
follows:
40
<PAGE<
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C> <C>
1-Year 5-Year Since Inception(1)
Corresponding Fund (without 5.94% 5.34% 6.53%
adjustment for service and
distribution fees)
Corresponding Fund (with 5.67% 5.01% 6.15%
adjustment for service fees)
Corresponding Fund (with 5.41% 4.75% 5.88%
distribution fees)
</TABLE>
(1)Corresponding Fund commenced operations on January 3, 1989.
The Corresponding Fund's adjusted yield for the 30 days ended December 31, 1997
was 5.91% (without adjustment for service and distribution fees), 5.66% (with
adjustment for service fees), and 5.41% (with adjustment for service and
distribution fees). These performance quotations should not be considered as
representative of the Fund's performance for any specified period in the
future.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the SEC, which
may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
LEGAL COUNSEL, INDEPENDENT AUDITORS/ACCOUNTANTS AND FINANCIAL STATEMENTS
Goodwin, Procter & Hoar LLP serves as counsel to the Trust and the Portfolio
Trust. Ernst & Young LLP serves as the independent auditors to the Trust and
the Portfolio Trust. Hale and Dorr LLP serves as counsel to the Standish
Portfolio Trust and PricewaterhouseCoopers LLP serves as independent
accountants to the Standish STAR Portfolio.
The Cash Portfolio and Treasury Portfolio's financial statements contained in
the 1997 Annual Report of the Merrimac Master Portfolio and the Statement of
Assets and Liabilities of the Trust as of June 15, 1998 and related footnotes
have been audited by Ernst & Young LLP, independent auditors, and are
incorporated by reference into this Statement of Additional Information.
41
