SCHRODER INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 15, 1997, AS AMENDED JUNE 20, 1997
[WORLD MAP GRAPHIC]
INVESTMENT ADVISER
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Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
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Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUBADMINISTRATOR
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Forum Administrative Services, Limited Liability Company ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
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Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder International Bond Fund ("the Fund") are offered for
sale at net asset value with no sales charge as an investment vehicle for
individuals, institutions, corporations and fiduciaries. Advisor Shares of the
Fund also are offered for sale at net asset value to individual investors, in
most cases through Service Organizations (as defined in the prospectuses) at
lower investment minimums but higher expenses than Investor Shares.
This Statement of Additional Information ("SAI") is not a prospectus and is
authorized for distribution only when preceded or accompanied by the Fund's
current prospectuses dated April 15, 1997, as amended June 20, 1997 and as may
be amended further from time to time (the "Prospectus"). This SAI contains
additional and more detailed information than that set forth in the Prospectus
and should be read in conjunction with the Prospectus and retained for future
reference. All terms used in this SAI that are defined in the Prospectus have
the meaning assigned in the Prospectus. You may obtain an additional copy of the
Prospectus without charge by writing to the Fund at Two Portland Square,
Portland, Maine 04101 or calling the numbers listed above.
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TABLE OF CONTENTS
INTRODUCTION..................................................3
INVESTMENT POLICIES...........................................3
Foreign Securities............................................3
Use of Forward Contracts in
Foreign Exchange Transactions.............................3
U.S. Government Securities....................................4
Bank Obligations..............................................4
Short-Term Debt Securities....................................4
Illiquid and Restricted Securities............................4
Banking Industry and Savings and Loan
Industry Obligations......................................4
Firm and Standby Commitment Agreements
and When-Issued Securities................................5
Brady Bonds...................................................5
Options on Securities.........................................6
Options on Foreign Currencies.................................8
Futures Transactions..........................................9
Forward Foreign Currency Exchange Contracts...................12
Limitations on Purchase and Sale of Futures Contracts
and Options on Futures Contracts..........................14
Additional Risks of Options on Securities, Futures Contracts
and Forward Foreign Currency Exchange Contracts
and Options..............................................15
Swap Agreements...............................................15
Warrants......................................................16
Short Sales Against-the-Box...................................16
High-Risk, High-Yield Securities..............................17
INVESTMENT RESTRICTIONS.......................................17
MANAGEMENT....................................................18
Officers and Trustees.........................................18
Investment Adviser............................................21
Administrative Services.......................................21
Distribution of Fund Shares...................................22
Service Organizations.........................................23
Portfolio Accounting..........................................24
Fees and Expenses.............................................24
PORTFOLIO TRANSACTIONS........................................24
Investment Decisions..........................................24
Brokerage and Research Services...............................25
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION....................................26
Determination of Net Asset Value per Share....................26
Redemption In-Kind............................................27
TAXATION......................................................27
OTHER INFORMATION.............................................29
Organization..................................................29
Capitalization and Voting.....................................30
Performance Information.......................................30
Custodian.....................................................31
Transfer Agent and Dividend Disbursing Agent..................31
Legal Counsel.................................................31
Independent Auditors..........................................32
Registration Statement........................................32
FINANCIAL STATEMENTS..........................................32
APPENDIX.....................................................A-1
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INTRODUCTION
Schroder International Bond Fund (the "Fund"), is a separately managed,
non-diversified series of Schroder Capital Funds (Delaware) (the "Trust"), an
open-end management investment company registered under the Investment Company
Act of 1940 (the "1940 Act"). The Trust currently consists of six separate
series, each of which has different investment objectives and policies.
The Fund's investment objective is to seek a high rate of total return. The Fund
currently seeks to achieve its investment objective by holding, as its only
investment securities, the securities of Schroder International Bond Portfolio
(the "Portfolio, a separate non-diversified series of Schroder Capital Funds II
("Schroder Core II"), an open-end management investment company registered under
the 1940 Act. Investments in foreign securities involve certain risks not
associated with domestic investing, and there can be no assurance that the
Fund's or Portfolio's investment objective will be achieved. Since the Fund has
the same investment objective and substantially similar policies as the
Portfolio and currently invests all of its assets in the portfolio, investment
policies and restrictions are discussed with respect to the Portfolio only.
INVESTMENT POLICIES
The Fund's investment objective and policies authorize it to invest in certain
types of securities and to engage in certain investment techniques identified in
"Investment Policies" and "Risk Considerations" in the Prospectus. The following
information supplements these sections of the Prospectus.
As described in the Prospectus, the Portfolio invests at least 65%, and normally
intends to invest substantially all, of its assets in non-U.S. debt securities
and debt-related investments, which may be denominated in foreign or U.S.
currency.
FOREIGN SECURITIES
The Portfolio may invest, without limit (subject to the other investment
policies applicable to the Portfolio), in U.S. dollar-denominated and
foreign-currency denominated foreign debt securities and in certificates of
deposit issued by foreign banks and foreign branches of U.S. banks to any extent
deemed appropriate by SCMI.
Investment in the securities of non-U.S. issuers may involve risks in addition
to those normally associated with investments in the securities of U.S. issuers.
There may be less publicly available information about foreign issuers than is
available for U.S. issuers, and foreign auditing, accounting and financial
reporting practices may differ from U.S. practices. Foreign securities markets
may have lower volume or activity than U.S. markets, resulting in thin trading
and lower liquidity than for U.S. issues. Consequently, securities prices may be
more volatile. In general, SCMI invests only in securities of companies and
governments of countries that, in its judgment, are both politically and
economically stable. Nevertheless, all foreign investments are subject to risks
of foreign political and economic instability, adverse movements in foreign
exchange rates, the imposition or tightening of exchange controls or other
limitations on the repatriation of foreign capital, and changes in foreign
governmental attitudes toward private investment, possibly leading to adoption
of foreign governmental restrictions affecting the payment of principal and
interest, nationalization, increased withholding, taxation, or confiscation of
portfolio assets, and other possible adverse political or economic developments
that would affect portfolio assets. In addition, it may be more difficult to
obtain and enforce a judgment against a foreign issuer or a foreign branch of a
domestic bank.
USE OF FORWARD CONTRACTS IN FOREIGN EXCHANGE TRANSACTIONS
In order to enhance returns, manage risk, reduce trading costs, and help protect
against changes in securities prices and foreign exchange rates, the Portfolio
may invest in forward contracts to purchase or sell an agreed-upon amount of a
specified currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. Such contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Although
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such contracts tend to minimize the risk of loss due to a decline in the value
of the currency that is sold, they expose the Portfolio to the risk that the
counterparty will be unable to perform, and they tend to limit commensurably any
potential gain that might result if the value of such currency increased during
the contract period.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in obligations that have remaining maturities not
exceeding one year issued or guaranteed by the U.S. Government or its agencies
or instrumentalities. Agencies and instrumentalities established or sponsored by
the U.S. Government that issue or guarantee debt include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Federal Land Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the Student Loan
Marketing Association. Except for obligations issued by the U.S. Treasury and
the Government National Mortgage Association, none of the obligations of the
other agencies or instrumentalities referred to above is backed by the full
faith and credit of the U.S. Government. There can be no assurance that the U.S.
Government will provide financial support to these obligations where it is not
obligated to do so.
BANK OBLIGATIONS
The Portfolio may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase in
excess of $1 billion. Such banks must be insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Association. The Portfolio
may also invest in certificates of deposit issued by foreign banks, denominated
in any major foreign currency. The Portfolio will invest in instruments issued
by foreign banks that, in the view of SCMI and the Board, are of
creditworthiness and financial stature in their respective countries comparable
to certificates of deposit issued by U.S. banks in which the Portfolio would
invest. A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. Although the borrower is liable
for payment of the draft, the bank unconditionally guarantees to pay the draft
at its face value on the maturity date.
SHORT-TERM DEBT SECURITIES
As described in the Prospectus, the Portfolio may invest in commercial paper.
The Portfolio also may invest in variable rate master demand notes, which are
obligations that permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payer of such notes. Generally both parties have
the right to vary the amount of the outstanding indebtedness on the notes.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" in the Prospectus sets forth the
circumstances in which the Portfolio may invest in illiquid and restricted
securities. In connection with the Portfolios original purchase of restricted
securities, SCMI may negotiate rights with the issuer to have such securities
registered for sale at a later time. Further, the expenses of registration of
restricted securities that are illiquid may also be negotiated by the Portfolio
with the issuer at the time such securities are purchased by the Portfolio. When
registration is required, however, a considerable period may elapse between a
decision to sell the securities and the time to sell such securities. A similar
delay might be experienced in attempting to sell such securities pursuant to an
exemption from registration. Thus, the Portfolio may not be able to obtain as
favorable a price as that prevailing at the time of the decision
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
The Portfolio will not invest in any obligation of a domestic or foreign bank
unless: (i) the bank has capital, surplus, and individual profits (as of the
date of the most recently published financial statements) in excess of $100
million (or the equivalent in other currencies); and (ii) in the case of a U.S.
bank, its deposits are insured by the
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Federal Deposit Insurance Corporation. These limitations do not prohibit
investments in the securities issued by foreign branches of U.S. banks, provided
such U.S. banks meet the foregoing requirements.
FIRM AND STANDBY COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
As discussed in the Prospectus, The Portfolio may from time to time purchase
securities on a "when-issued," or "firm commitment" or "standby commitment"
basis. Debt securities are often issued in this manner. The price of such
securities, which may be expressed in yield terms, is fixed at the time a
commitment to purchase is made, but delivery of and payment for the when-
issued, firm or standby commitment securities take place at a later date.
Normally, settlement date occurs within one month of the purchase. During the
period between purchase and settlement, no payment is made by the Portfolio and
no interest accrues to the Portfolio. To the extent that assets of the Portfolio
are held in cash pending the settlement of a purchase of securities, the
Portfolio would earn no income; it is the Trust's intention, however, that the
Portfolio will be fully invested to the extent practicable and subject to the
policies stated herein. Although when-issued, or firm or standby commitment
securities may be sold prior to the settlement date, the Trust intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons.
At the time the Portfolio makes the commitment to purchase a security on a
when-issued, firm or standby commitment basis, it records the transaction and
reflects the amount due and the value of the security in determining the
Portfolio's net asset value. The market value of the when-issued, firm or
standby commitment securities may be more or less than the purchase price
payable at the settlement date. The Portfolio will purchase such securities only
when, in SCMI's opinion, there is minimal credit risk for the Portfolio. To the
extent so required by the Securities and Exchange Commission ("SEC"), the
Portfolio will establish a segregated account in which it will maintain liquid
assets, such as cash and U.S. government securities or other liquid securities
or assets deemed permissible by the SEC for such purpose (collectively, the
"Segregable Assets"), at least equal in value to any commitments to purchase
securities on a when-issued, firm or standby commitment basis. Securities held
as Segregable Assets will mature or, if necessary, be sold on or before the
settlement date. When-issued securities may include bonds purchased on a "when,
as and if issued" basis under which the issuance of the securities depends upon
the occurrence of a subsequent event. Any significant commitment of the
Portfolio's assets to the purchase of securities on a "when, as and if issued"
basis may increase the volatility of its net asset value. For purposes of the
Portfolio's investment policies, the purchase of securities with a settlement
date occurring on a Public Securities Association approved settlement date is
considered a normal delivery and not a when-issued or forward commitment
purchase.
BRADY BONDS
As discussed in the Prospectus, the Portfolio may invest in Brady Bonds. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed-rate par
bonds or floating-rate discount bonds, are generally collateralized in full as
to principal by U.S. Treasury zero coupon bonds having the same maturity as the
Brady Bonds. Interest payments on these Brady Bonds generally are collateralized
on a one-year or longer rolling-forward basis by cash or securities in an amount
that, in the case of fixed-rate bonds, is equal to at least one year of interest
payments or, in the case of floating-rate bonds, initially is equal to at least
one year's interest payments based on the applicable interest rate at that time
and adjusted at regular intervals thereafter. Certain Brady Bonds are entitled
to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are viewed as
speculative. There can be no assurance that Brady Bonds in which the Portfolio
may invest will not be subject to restructuring arrangements or to requests for
new credit, which may cause the Portfolio to suffer a loss of interest or
principal on any of its holdings.
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OPTIONS ON SECURITIES
WRITING CALL OPTIONS. As discussed in the Prospectus, the Portfolio may sell
("write") covered call options on its portfolio securities in an attempt to
enhance investment performance. A call option sold by the Portfolio is a
short-term contract, having a duration of nine months or less, that gives the
purchaser of the option the right to buy, and the writer of the option (in
return for a premium received) the obligation to sell, the underlying security
at the exercise price upon the exercise of the option at any time prior to the
expiration date, regardless of the market price of the security during the
option period. A call option may be covered by, among other things, the writer's
owning the underlying security throughout the option period, or by holding, on a
share-for-share basis, a call on the same security as the call written, where
the exercise price of the call held is equal to or less than the price of the
call written, or greater than the exercise price of a call written if the
difference is maintained by the Portfolio in Segregable Assets in a segregated
account with its custodian.
The Portfolio may write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Portfolio gives
up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, the Portfolio retains the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. The Portfolio, in writing "American Style" call
options, must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer, and that in such circumstances the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. In contrast,
"European Style" options may only be exercised on the expiration date of the
option. Covered call options and the securities underlying such options will be
listed on national securities exchanges, except for certain transactions in
options on debt securities and foreign securities.
The Portfolio may protect itself from further losses due to a decline in value
of the underlying security or from the loss of ability to profit from
appreciation by buying an identical option, in which case the purchase cost may
offset the premium. In order to do this, the Portfolio makes a "closing purchase
transaction"-- the purchase of a call option on the same security with the same
exercise price and expiration date as the covered call option which it has
previously written on any particular security. The Portfolio realizes a gain or
loss from a closing purchase transaction if the amount paid to purchase a call
option in a closing transaction is less or more than the amount received from
the sale of the covered call option. Also, because increases in the market price
of a call option generally reflect increases in the market price of the
underlying security, any loss resulting from the closing out of a call option is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Portfolio. When a security is to be sold from
the Portfolio's investment portfolio, the Portfolio will first effect a closing
purchase transaction so as to close out any existing covered call option on that
security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") that provides a secondary market for an
option with the same exercise price and expiration date. There is no assurance
that a liquid secondary market (on an Exchange or otherwise) will exist for any
particular option, or at any particular time, and for some options no secondary
market on an Exchange or otherwise may exist. If the Portfolio is unable to
effect a closing purchase transaction involving an exchange-traded option, the
Portfolio will not sell the underlying security until the option expires or the
Portfolio delivers the underlying security upon exercise. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller, and generally do
not have as much market liquidity as exchange-traded options. Therefore, a
closing purchase transaction for an over-the-counter option may in many cases
only be made with the other party to the option.
The Portfolio pays brokerage commissions and dealer spreads in connection with
writing covered call options and effecting closing purchase transactions, as
well as for purchases and sales of underlying securities. The writing of covered
call options could result in significant increases in the Portfolio's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put
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option writing transactions be covered, the Portfolio may, to the extent
determined appropriate by SCMI, engage without limitation in the writing of
options on its portfolio securities.
WRITING PUT OPTIONS. The Portfolio, as discussed in the Prospectus, may also
write covered put options. A put option written by the Portfolio is "covered" if
the Portfolio maintains Segregable Assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is also "covered"
if the Portfolio holds on a share-for-share basis a put on the same security as
the put written, where the exercise price of the put held is equal to or greater
than the exercise price of the put written, or less than the exercise price of
the put written if the difference is maintained by the Portfolio in Segregable
Assets in a segregated account with its custodian.
The premium that the Portfolio receives from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand, and
interest rates.
The Portfolio may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. If the Portfolio is able to enter into a closing purchase
transaction, the Portfolio will realize a profit or loss from such transaction
if the cost of such transaction is less or more than the premium received from
the writing of the option. After writing a put option, the Portfolio may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
In addition, the Portfolio, also note in the Prospectus, may also write
straddles (combinations of covered puts and calls on the same underlying
security). The extent to which the Portfolio may write covered call options and
enter into so-called "straddle" transactions involving put or call options may
be limited by the requirements of the Internal Revenue Code for qualification as
a regulated investment company and the Fund's intention to qualify as such.
PURCHASING OPTIONS. The Portfolio, as discussed in the Prospectus, may purchase
put or call options that are traded on an Exchange or in the over-the-counter
market. Options traded in the over-the-counter market may not be as actively
traded as those listed on an Exchange. Accordingly, it may be more difficult to
value such options and to be assured that they can be closed out at any time.
The Portfolio will engage in such transactions only with firms of sufficient
creditworthiness so as to minimize these risks.
The Portfolio may purchase put options on securities to protect its holdings in
an underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
with one another. The purchase of put options on securities held in the
portfolio or related to such securities will enable the Portfolio to preserve,
at least partially, unrealized gains occurring prior to the purchase of the
option on a portfolio security without actually selling the security. In
addition, the Portfolio will continue to receive interest or dividend income on
the security.
The Portfolio may also purchase call options on securities the Portfolio intends
to purchase to protect against substantial increases in prices of such
securities pending its ability to invest in an orderly manner in such
securities. In order to terminate an option position, the Portfolio may sell put
or call options identical to those previously purchased, which could result in a
net gain or loss depending upon whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option when it was purchased.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. There can be no assurance
that viable markets will develop or continue in the U.S. or abroad for options
on securities. If a put or call option purchased by the Portfolio is not sold
when it has remaining value, and if the market price of the underlying security,
in the case of a put, remains equal to or greater than the exercise price, or,
in the case of a call, remains less than or equal to the exercise price, the
Portfolio will not be able to exercise profitably the option and will lose its
entire investment in the option. Also, the price of a put or call option
purchased to hedge against price movements in a related security may move more
or less than the price of the related security.
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OPTIONS ON FOREIGN CURRENCIES
As discussed in the Prospectus, the Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that of the
Portfolio's transactions in currency futures contracts or forward contracts. For
example, a decline in the U.S. dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
such currency declines, the Portfolio will have the right to sell such currency
for a fixed amount exceeding the market value of such currency, resulting in a
gain that may offset, in whole or in part, the negative effect of currency
depreciation on the value of the Portfolio's securities denominated in that
currency.
Conversely, if a rise is projected in the dollar value of a currency
denominating securities to be acquired (thereby increasing the cost of such
securities) the Portfolio may purchase call options on such currency. If the
value of such currency increases, the purchase of such call options enables the
Portfolio to purchase currency for a fixed amount that is less than the market
value of such currency, resulting in a gain that may offset, at least partially,
the effect of any currency-related increase in the price of securities the
Portfolio intends to acquire. As in the case of other types of options
transactions, however, the benefit the Portfolio derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options that would deprive it of some or all of
the benefits of advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging purposes.
For example, if the Portfolio anticipates a decline in the dollar value of
foreign currency-denominated securities due to declining exchange rates, it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received by the Portfolio.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Portfolio to
offset such increased cost up to the amount of the premium. As in the case of
other types of options transactions, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and the Portfolio would be
required to purchase or sell the underlying currency at a loss which may not be
fully offset by the amount of the premium. As a result of writing options on
foreign currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in currency exchange rates.
A call option written on foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional consideration (or for additional
consideration comprised of Segregable Assets held in a segregated account by its
custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Portfolio holds a call on the
same foreign currency for the same principal amount as the call written where
the exercise price of the call held: (i) is equal to or less than the exercise
price of the call written; or (ii) is greater than the exercise price of the
call written if the amount of the difference is maintained by the Portfolio in
Segregable Assets in a segregated account with its custodian.
Options on foreign currencies to be written or purchased by the Portfolio will
be traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the-counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option.
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FUTURES TRANSACTIONS
The Portfolio may purchase and sell futures contracts on securities, interest
rates, foreign currency, and on indexes of securities to hedge against
anticipated changes in interest rates and other economic factors that might
otherwise have an adverse effect upon the value of the Portfolio's portfolio
securities. The Portfolio may also enter into such futures contracts in order to
lengthen or shorten the average maturity or duration of the Portfolio's
investment portfolio. For example, the Portfolio may purchase futures contracts
as a substitute for the purchase of longer-term debt securities to lengthen the
average duration of the Portfolio's investment portfolio of fixed-income
securities.
The Portfolio may also purchase and sell other futures when deemed appropriate
in order to hedge portions of its portfolio. In addition, the Portfolio may
enter into contracts for the future delivery of foreign currencies to hedge
against changes in currency exchange rates. The Portfolio may also purchase and
write put and call options on futures contracts of the type into which the
Portfolio is authorized to enter and may engage in related closing transactions.
In the U.S., all such futures on securities, debt index futures, foreign
currency futures and related options are traded on exchanges that are regulated
by the Commodity Futures Trading Commission ("CFTC"). Subject to compliance with
applicable CFTC rules, the Portfolio also may enter into futures contracts
traded on foreign futures exchanges as long as trading on the aforesaid foreign
futures exchanges does not subject the Portfolio to risks that are materially
greater than the risks associated with trading on U.S. exchanges.
A futures contract is an agreement to buy or sell a security or currency (or to
deliver a final cash settlement price in the case of a contract relating to an
index or otherwise not calling for physical delivery of a security or currency
at the end of trading in the contracts) for a set price in a future month. In
the U.S., futures contracts are traded on boards of trade that have been
designated "contract markets" by the CFTC. Futures contracts trade on these
markets through an "open outcry" auction on the exchange floor. Currently, there
are futures contracts based on a variety of instruments, indices and currencies.
When a purchase or sale of a futures contract is made by the Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. government securities ("initial
margin") as a partial guarantee of its performance under the contract. The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract and is returned to the Portfolio upon termination of the
contract if all contractual obligations have been satisfied. The Portfolio
expects to earn interest income on its initial margin deposits. A futures
contract held by the Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day, as the value of the security,
currency or index fluctuates, the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by the Portfolio but is instead a settlement
between the Portfolio and the broker of the amount one would owe the other if
the futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.
The Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
Positions taken in the futures markets are not normally held until delivery or
final cash settlement is required, but are instead liquidated through offsetting
transactions, which may result in a gain or a loss. While futures positions
taken by the Portfolio will usually be liquidated in this manner, the Portfolio
may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Portfolio for it to do so.
A clearing organization associated with the exchange on which futures are traded
assumes responsibility for closing-out transactions and guarantees that as
between the clearing members of an exchange, the sale and purchase obligations
will be performed with regard to all positions that remain open at the
termination of the contract.
FUTURES ON DEBT SECURITIES. A futures contract on a debt security is a binding
contractual commitment which, if held to maturity, will result in an obligation
to make or accept delivery, during a particular month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities (I.E., assuming a
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"long" position), the Portfolio will legally obligate itself to accept the
future delivery of the underlying security and pay the agreed-upon price. By
selling futures on debt securities (I.E., assuming a "short" position) it will
legally obligate itself to make the future delivery of the security against
payment of the agreed-upon price. Open futures positions on debt securities will
be valued at the most recent settlement price, unless such price does not appear
to the Trustees to reflect the fair value of the contract, in which case the
positions will be valued by or under the direction of the Trustees.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. The Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in interest
rates that would adversely affect the value of the Portfolio's portfolio
securities. When hedging of this character is successful, any depreciation in
the value of investment portfolio securities will be substantially offset by
appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
intends to purchase particular securities and it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the subsequent
securities purchase. The Portfolio may also purchase futures contracts as a
substitute for the purchase of longer-term securities to lengthen the average
duration of the Portfolio's investment portfolio.
The Portfolio could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
The Portfolio may enter into futures on debt securities indexes to the extent it
has debt securities in its investment portfolio. By establishing an appropriate
"short" position in securities index futures, the Portfolio may seek to protect
the value of its portfolio against an overall decline in the market for
securities. Alternatively, in anticipation of a generally rising market, the
Portfolio can seek to avoid losing the benefit of apparently low current prices
by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Portfolio will be
affected to a lesser degree by adverse overall market price movements, unrelated
to the merits of specific portfolio securities, than would otherwise be the
case. The Portfolio may also purchase futures on debt securities or indexes as a
substitute for the purchase of longer-term debt securities to lengthen the
average duration of the Portfolio's debt portfolio.
CURRENCY FUTURES. A sale of a currency futures contract creates an obligation by
the Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by the Portfolio, as purchaser,
to take delivery of an amount of currency at a specified future time at a
specified price. The Portfolio may sell a currency futures contract if SCMI
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Portfolio's securities denominated in such
currency. If SCMI anticipates that exchange rates will rise, the Portfolio may
purchase a currency futures contract to protect against an increase in the price
of securities denominated in a particular currency the Portfolio intends to
purchase. To a limited extend, the Portfolio may purchase currency futures to
increase exposure in foreign currencies, which are expected to appreciate and
thereby increase total return. Although the terms of currency futures contracts
specify actual delivery or receipt, in most instances the contracts are closed
out before the settlement date without the making or taking of delivery of the
currency. Closing out of a currency futures contract generally is effected by
entering into an offsetting purchase or sale transaction. To offset a currency
futures contract sold by the Portfolio, the Portfolio purchases a currency
futures contract for the same aggregate amount of currency and delivery date. If
the price in the sale exceeds the price in the offsetting
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purchase, the Portfolio is immediately paid the difference. Similarly, to close
out a currency futures contract purchased by the Portfolio, the Portfolio sells
a currency futures contract. If the offsetting sale price exceeds the purchase
price, the Portfolio realizes a gain, and if the offsetting sale price is less
than the purchase price, the Portfolio realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of the Portfolio's
securities. The degree of correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
for hedging purposes over a short-term period. Such distortions are generally
minor and would diminish as the contract approached maturity. Another risk is
that SCMI could be incorrect in its expectation as to the direction or extent of
various exchange rate movements or the time span within which the movements take
place.
OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk management
purposes, the Portfolio may purchase and write call and put options on futures
contracts that are traded on exchanges licensed and regulated by the CFTC for
the purpose of options trading, or, subject to applicable CFTC rules, on foreign
exchanges. Over-the- counter options are not subject to CFTC limits. A "call"
option on a futures contract gives the purchaser the right, in return for the
premium paid, to purchase a futures contract (assume a "long" position) at a
specified exercise price at any time before the option expires. A "put" option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price at any time
before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to sell the
futures contract (to deliver a "long" position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a "put," the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option generally realizes a gain or loss by
buying or selling an offsetting option at a market price that reflects an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by the Portfolio to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Portfolio purchases an option on a futures contract, it may
obtain benefits similar to those that would result if it held the futures
position itself.
The purchase of put options on futures contracts is a means of hedging the
Portfolio's investment portfolio against the risk of rising interest rates,
declining securities prices or declining exchange rates for a particular
currency. The purchase of a call option on a futures contract represents a means
of hedging against a market advance affecting securities prices or currency
exchange rates when the Portfolio is not fully invested or of lengthening the
average maturity or duration of the Portfolio's investment portfolio. Depending
on the pricing of the option compared to either the futures contract upon which
it is based or upon the price of the underlying securities or currencies, it may
or may not be less risky than ownership of the futures contract or underlying
securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Portfolio will not be subject to a risk of
loss on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
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If the Portfolio writes options on futures contracts, the Portfolio will receive
a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will realize a gain in
the amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Portfolio. If the option
is exercised, the Portfolio will incur a loss in the option transaction, which
will be reduced by the amount of the premium it has received, but which may
partially offset favorable changes in the value of its portfolio securities or
the currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying securities or the currencies in which
such securities are denominated. If the futures price at expiration is below the
exercise price, the Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings of securities or the currencies in which such securities
are denominated.
The writing of a put option on a futures contract is analogous to the purchase
of a futures contract. For example, if the Portfolio writes a put option on a
futures contract on debt securities related to securities that the Portfolio
expects to acquire and the market price of such securities increases, the net
cost to the Portfolio of the debt securities acquired by it will be reduced by
the amount of the option premium received. Of course, if market prices have
declined, the Portfolio's purchase price upon exercise may be greater than the
price at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, the Portfolio's ability to establish and close out options positions at
fairly established prices will be subject to the maintenance of a liquid market.
The Portfolio will not purchase or write options on futures contracts unless the
market for such options has sufficient liquidity such that the risks associated
with such options transactions are not at unacceptable levels.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract (a "forward contract") is an
obligation individually negotiated and privately traded by currency traders and
their customers to purchase or sell a specific currency for an agreed price at a
future date (usually less than a year). A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Although foreign exchange dealers do not charge a fee for commissions, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Although these contracts are intended to
minimize the risk of loss due to a decline in the value of the hedged
currencies, they also limit any potential gain that might result should the
value of such currencies increase.
While the Portfolio may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates that contradict the Adviser's
expectations may result in poorer overall performance for the Portfolio than if
it had not engaged in such transactions. Moreover, there may be an imperfect
correlation between the Portfolio's portfolio holdings of securities denominated
in a particular currency and forward contracts entered into by the Portfolio.
Such imperfect correlation may prevent the Portfolio from achieving the intended
hedge or expose the Portfolio to the risk of currency exchange loss.
The Portfolio holds Segregable Assets in a segregated account with its custodian
in an amount equal (on a daily marked-to-market basis) to the amount of the
commitments under these contracts. At the maturity of a forward contract, the
Portfolio may either accept or make delivery of the currency specified in the
contract, or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. The Portfolio
will only enter into such a forward contract if it is expected that there will
be a liquid market in which to close out the contract. However, there can be no
assurance that a liquid market will exist in which to close a forward contract,
in which case the Portfolio may suffer a loss.
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Normally, consideration of the prospect for currency parities are incorporated
in a longer term investment decision made with regard to overall diversification
strategies. However, SCMI believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best interest
of the Portfolio will be served. For example, when the Portfolio enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, the Portfolio is able to insulate itself from a possible
loss resulting from a change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received,
although the Portfolio would also forego any gain it might have realized had
rates moved in the opposite direction. This technique is sometimes referred to
as a "settlement" hedge or "transaction" hedge.
When SCMI believes that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar, it may enter into a forward
contract to sell, for a fixed amount of dollars, the amount of foreign currency
approximating the value of some or all of the Portfolio's portfolio securities
denominated in such foreign currency. Such a hedge (sometimes referred to as a
"position hedge") will tend to offset both positive and negative currency
fluctuations but will not offset changes in security values caused by other
factors. The Portfolio also may hedge the same position by using another
currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency ("proxy" hedge). The precise
matching of the forward contract amounts and the value of the securities
involved is not generally possible since the future value of such securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures.
Finally, the Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, tends to reduce
or eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, much as if the Portfolio had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a decline
in the hedged currency but cause the Portfolio to assume the risk of
fluctuations in the value of the currency it purchases.
At the consummation of the forward contract, the Portfolio may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
If the Portfolio chooses to make delivery of the foreign currency, it may be
required to obtain such currency for delivery through the sale of portfolio
securities denominated in such currency or through conversion of other assets of
the Portfolio into such currency. If the Portfolio engages in an offsetting
transaction, the Portfolio realizes a gain or a loss to the extent that there
has been a change in forward contract prices. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract.
The Portfolio's dealing in forward contracts are limited to the transactions
described above. Of course, the Portfolio is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by SCMI. The Portfolio generally will not
enter into a forward contract with a term of greater than one year.
In cases of transactions that constitute "transaction" or "settlement" hedges or
"position" hedges (including "proxy" hedges) or "cross-currency" hedges that
involve the purchase and sale of two different foreign currencies directly
through the same forward foreign currency exchange contract, the Portfolio may
deem its forward currency hedge position to be covered by underlying Portfolio
investment portfolio securities or may establish a segregated account comprised
of Segregable Assets with its Custodian in an amount equal to the value of the
Portfolio's total assets committed to the consummation of the subject hedge. In
the case of "anticipatory" hedges and "cross-currency" hedges that involve the
purchase and sale of two different foreign currencies indirectly through
separate forward currency contracts, to the extent required by the SEC the
Portfolio will establish a segregated account with its
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Custodian as described above. In the event the Portfolio establishes a
segregated account, the Portfolio marks-to-market the value of the Segregable
Assets. If the value of any securities placed in the segregated account
declines, additional Segregable Assets will be placed in the account by the
Portfolio on a daily basis so that the value of the account will equal the
amount of the Portfolio's commitments with respect to such contracts.
It should be realized that this method of protecting the value of the
Portfolio's investment portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. It also reduces any potential gain that may have
otherwise occurred had the currency value increased above the settlement price
of the contract. The Portfolio's forward foreign currency transactions may be
limited by the requirements of Subchapter M of the Code for qualification as a
regulated investment company.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS.
Although the Portfolio will not be a commodity pool, certain derivative
instruments that it uses subject it to the rules of the CFTC, which limit the
extent to which the Portfolio may use such derivatives. The Portfolio may enter
into futures contracts or related options for hedging purposes without limit.
The Portfolio may not engage in exchange-traded futures contracts and related
options for other purposes if, immediately thereafter, the aggregate initial
margin deposits relating to such positions plus premiums paid by the Portfolio
for unexpired options, less the amount by which any such options are
"in-the-money," would exceed 5% of the liquidation value of the Portfolio's
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the- money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
The Portfolio may invest up to 5% of its assets, represented by the premium
paid, in the purchase of call and put options. The Portfolio may write (I.E.
sell) covered call and put option contracts in an amount not to exceed 20% of
the value of the Portfolio's net assets at the time such options are written.
When so required by the SEC, the Portfolio will set aside Segregable Assets in a
segregated account to cover its obligations relating to investments in
derivatives. To maintain this required cover, the Portfolio may have to sell
portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position at a reasonable price.
When purchasing a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) Segregable Assets that, when
added to the amounts deposited with a futures commission merchant as margin, are
equal to the market value of the futures contract. Alternatively, the Portfolio
may "cover" its position by purchasing a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Portfolio.
When selling a futures contract, the Portfolio will maintain with its custodian
(and mark-to-market on a daily basis) liquid Segregable Assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Portfolio's custodian).
When selling a call option on a futures contract, the Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) Segregable Assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Portfolio may cover its position by entering into a
long position in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying the futures
contract, or by holding a separate call option permitting the Portfolio to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Portfolio.
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When selling a put option on a futures contract, the Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) Segregable Assets that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Portfolio may cover the position either by entering into a
short position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Portfolio.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Portfolio's securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities (including technical influences in futures trading
and futures options) and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Portfolio seeks to close out a futures or a futures option position, and the
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS, AND FOREIGN FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS
Futures contracts, options on futures contracts, options on securities,
currencies, and options on currencies may be traded on foreign exchanges or in
over-the-counter markets. Such transactions may not be regulated as effectively
as similar transactions in the U.S.; may not involve a clearing mechanism and
related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political, legal and economic factors; (ii) lesser availability than in the U.S.
of data on which to make trading decisions; (iii) delays in the Portfolio's
ability to act upon economic events occurring in foreign markets during
non-business hours in the U.S.; (iv) the imposition of different exercise and
settlement terms and procedures and different margin requirements than in the
U.S.; and (v) lesser trading volume.
SWAP AGREEMENTS
As discussed in the Prospectus, the Portfolio may enter into interest-rate,
index and currency exchange-rate swap agreements. The "notional amount" of the
swap agreement is only a fictive basis on which to calculate the obligations
that the parties to a swap agreement have agreed to exchange. Most swap
agreements entered into by the Portfolio would calculate the obligations of the
parties to the agreement on a "net" basis. Consequently,
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the Portfolio's obligations (or rights) under a swap agreement are generally
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). The Portfolio's obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Portfolio) and any
accrued but unpaid net amounts owed to a swap counterparty will be covered by
maintaining a segregated account comprised of Segregable Assets to avoid any
potential leveraging of the Portfolio's investment portfolio. The Portfolio will
not enter into a swap agreement with any single party if the net amount owed or
to be received under existing contracts with that party would exceed 5% of the
Portfolio's assets.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which includes the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that: (i) have
individually tailored terms; (ii) lack exchange style offset and the use of a
clearing organization or margin system; (iii) are undertaken in conjunction with
a line of business; and (iv) are not marketed to the public.
WARRANTS
The holder of a warrant has the right to purchase a given number of shares of a
particular issuer at a specified price until expiration of the warrant. Such
investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. If a warrant is not exercised by the date of its
expiration, the Portfolio will lose its entire investment in such warrant.
SHORT SALES AGAINST-THE-BOX
A short sale is a transaction in which the Portfolio sells through a broker a
security it does not own in anticipation of a decline in market price. A short
sale "against-the-box" is a short sale in which, at the time of the short sale,
the Portfolio owns or has the right to obtain securities equivalent in kind and
amount. The Portfolio may enter into a short sale against-the-box to, among
other reasons, hedge against a possible market decline in the value of a
security owned, or to defer recognition of a gain or loss for federal income tax
purposes on the security owned by the Portfolio. Short sales against-the-box
will be limited to no more than 5% of the Portfolio's net assets.
If the value of a security sold short against-the-box increases, the Portfolio
would suffer a loss when it purchases or delivers to the selling broker the
security sold short. If a broker with which the Portfolio has open short sales
were to become bankrupt, the Portfolio could experience losses or delays in
recovering gains on short sales. The Portfolio will only enter into short sales
against-the-box with brokers it believes are creditworthy.
16
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HIGH-RISK, HIGH-YIELD SECURITIES
A projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield bond prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield bonds, especially in a thinly traded
market. Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on the Portfolio's net asset
value and investment practices. In addition, there may be special tax
considerations associated with investing in high yield bonds structured as zero
coupon or payment-in-kind securities. Interest on these securities is recorded
annually as income even though no cash interest is received until the security's
maturity or payment date. As a result, the amounts that have accrued each year
are required to be distributed to shareholders and such amounts will be taxable
to shareholders. Therefore, the Portfolio may have to sell some of its assets to
distribute cash to shareholders. These actions are likely to reduce the
Portfolio's assets and may thereby increase its expense ratios and decrease its
rate of return.
INVESTMENT RESTRICTIONS
The following investment restrictions restate or are in addition to those
described under "Investment Restrictions" and "Investment Policies" in the
Prospectus. Under the following restrictions -- which unless otherwise indicated
may not be changed without the approval of the holders of a majority of the
Fund's outstanding shares -- the Fund will not:
1. The Fund may not concentrate investments in any particular
industry; therefore, the Fund will not purchase the securities of
companies in any one industry if, thereafter, 25% or more of the
Fund's total assets would consist of securities of companies in
that industry. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (or repurchase agreements with respect thereto).
An investment of more than 25% of the Fund's assets in the
securities of issuers located in one country does not contravene
this policy.
2. The Fund may not borrow money in excess of 33-1/3% of its total
assets taken at market value (including the amount borrowed) and
then only from a bank as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle
securities transactions that may otherwise require untimely
dispositions of portfolio securities.
3. The Fund may not purchase or sell real estate, provided that the
Fund may invest in securities issued by companies that invest in
real estate or interests therein.
4. The Fund may not make loans to other persons, provided that for
purposes of this restriction, entering into repurchase agreements
or acquiring any otherwise permissible debt securities including
engaging in securities lending shall not be deemed to be the
making of a loan.
5. The Fund may not invest in commodities or commodity contracts,
except that, subject to the restrictions described in the
Prospectus and elsewhere in this SAI, the Fund may: (i) enter into
futures contracts and options on futures contracts; (ii) enter
into foreign forward currency exchange contracts and foreign
currency options; (iii) purchase or sell currencies on a spot or
forward basis; and (iv) may enter into futures contracts on
securities, currencies or on indices of such securities or
currencies, or any other financial instruments, and may purchase
and sell options on such futures contracts.
6. The Fund may not underwrite securities issued by other persons
except to the extent that, in connection with the disposition of
its portfolio investments, it may be deemed to be an underwriter
under U.S. securities laws.
7. The Fund may not issue senior securities except to the extent
permitted by the 1940 Act.
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<PAGE>
The following investment restrictions of the Fund are non-fundamental policies:
1. The Fund may not acquire securities or invest in repurchase
agreements with respect to any securities if, as a result, more
than 15% of its net assets (taken at current value) would be
invested in illiquid securities (securities that cannot be
disposed of within seven days at their then-current value),
including repurchase agreements not entitling the holder to
payment of principal within seven days and securities that are not
readily marketable by virtue of restrictions on the sale of such
securities to the public without registration under the Securities
Act of 1933, as amended ("Restricted Securities"). Illiquid
securities do not include securities that can be sold to the
public in foreign markets or that may be eligible for resale to
qualified institutional purchasers pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the
investment adviser pursuant to guidelines adopted by the Trust's
Board of Trustees.
2. The Fund may not make investments for the purpose of exercising
control or management, except in connection with a merger,
consolidation, acquisition, or reorganization with another
investment company or series thereof. (Investments by the Fund in
wholly owned investment entities created under the laws of certain
foreign countries will not be deemed the making of investments for
the purpose of exercising control or management.)
3. The Fund may not invest in interests in oil, gas or other mineral
exploration, resource, or lease transactions or development
programs but may purchase readily marketable securities of
companies that operate, invest in, or sponsor such programs.
4. The Fund may acquire or retain the securities of any other
investment company to the extent permitted by the 1940 Act,
including in connection with a merger, consolidation, acquisition,
or reorganization.
Except for the policies on borrowing and illiquid securities, the percentage
restrictions described above apply only at the time of investment and require no
action by the Fund as a result of subsequent changes in value of the investments
or the size of the Fund.
MANAGEMENT
OFFICERS AND TRUSTEES
The following information relates to the principal occupations during the past
five years of each Trustee and executive officer of the Trust and shows the
nature of any affiliation with SCMI.
PETER E. GUERNSEY, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Insurance Consultant since August 1986; prior thereto
Senior Vice President, Marsh & McLennan, Inc., insurance brokers.
JOHN I. HOWELL, 80, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Private Consultant since February 1987; Honorary Director,
American International Group, Inc.; Director, American International Life
Assurance Company of New York.
CLARENCE F. MICHALIS, 75, c/o the Trust, Two Portland Square, Portland, Maine
- - Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy, Jr.
Foundation (charitable foundation).
HERMANN C. SCHWAB, 77, c/o the Trust, Two Portland Square, Portland, Maine -
Chairman and Trustee of the Trust; retired since March, 1988; prior thereto,
consultant to SCMI since February 1, 1984.
MARK J. SMITH*, 35, 33 Gutter Lane, London, England - President and Trustee
of the Trust; Senior Vice President and Dirctor of SCMI since April 1990;
Director and Senior Vice President, Schroder Advisors.
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<PAGE>
MARK ASTLEY, 33, 787 Seventh Avenue, New York, New York - Vice President of the
Trust; First Vice President of SCMI, prior thereto, employed by various
affiliates of SCMI in various positions in the investment research and portfolio
management areas since 1987.
ROBERT G. DAVY, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of SCMI in various positions in the investment
research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON, 55, 787 Seventh Avenue, New York, New York - Vice
President of the Trust; Secretary of SCM since July 1995; Senior Vice President
(since April 1997) and General Counsel of Schroders Incorporated since May 1987;
prior thereto, partner of Sullivan & Worcester, a law firm.
RICHARD R. FOULKES, 51, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd. since 1989.
ROBERT JACKOWITZ, 30, 787 Seventh Avenue, New York, New York - Treasurer of the
First Trust; Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI and SCM since April
1997; and Assistant Treasurer of Schroders Incorporated since January 1990.
JOHN Y. KEFFER, 54, Two Portland Square, Portland, Maine - Vice President of the
Trust; President of FFC, the Fund's transfer and dividend disbursing agent and
other affiliated entities including Forum Financial Services, Inc. and Forum
Advisors, Inc.
JANE P. LUCAS, 35, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director and Senior Vice President SCMI; Director of SCM since
September 1995; Director of Schroder Advisors since September 1996; Assistant
Director Schroder Investment Management Ltd. since June 1991.
CATHERINE A. MAZZA, 37, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
MICHAEL PERELSTEIN, 41, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Director since May 1997 and Senior Vice President of SCMI since
January 1997; prior thereto, Managing Director of MacKay - Shields Financial
Corp.
ALEXANDRA POE, 36, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust; Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; Secretary of
Schroder Advisors; prior thereto, an investment management attorney with Gordon
Altman Butowsky Weitzen Shalov & Wein since July 1994; prior thereto counsel and
Vice President of Citibank, N.A. since 1989.
THOMAS G. SHEEHAN, 42, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust; Counsel, Forum Financial
Services, Inc. since 1993; prior thereto, Special Counsel, U.S. Securities and
Exchange Commission, Division of Investment Management, Washington, D.C.
FARIBA TALEBI, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Group Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987;
Director of SCM since April 1997.
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<PAGE>
JOHN A. TROIANO, 38, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCM since April 1997; Managing Director and Senior Vice
President of SCMI since October 1995; prior thereto, employed by various
affiliates of SCMI in various positions in the investment research and portfolio
management areas since 1981.
IRA L. UNSCHULD, 31, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993.
CATHERINE S. WOOLEDGE, 55, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since November 1996. Prior thereto, associate at Morrison &
Foerster, Washington, D.C. from October 1994 to November 1996, associate
corporate counsel at Franklin Resources, Inc. from September 1993 to September
1994, and prior thereto associate at Drinker Biddle & Reath, Philadelphia, PA.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
Schroder Advisors is a wholly owned subsidiary of SCMI, which is a wholly owned
subsidiary of Schroders Incorporated, which in turn is an indirect, wholly owned
U.S. subsidiary of Schroders plc. Schroder Capital Management Inc. ("SCM") is
also a wholly owned subsidiary of Schroders Incorporated.
Officers and Trustees who are interested persons of the Trust and Schroder Core
II receive no salary, fees or compensation from the Fund or the Portfolio.
Independent Trustees of the Trust and Schroder Core II receive an annual fee of
$1,000 and a fee of $250 for each meeting of the Board attended by them except
in the case of Mr. Schwab, who receives an annual fee of $1,500 and a fee of
$500 for each meeting attended. The Trust has no bonus, profit sharing, pension
or retirement plans.
The following table provides the fees paid to each Trustee of the Trust for the
fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement Benefits From Trust And Fund
Aggregate Accrued As Part of Estimated Annual Complex Paid To
Compensation From Trust Expenses Benefits Upon Trustees
Name of Trustee Trust Retirement
- ------------------------------- -------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $1,750
Mr. Howell 1,750 0 0 1,750
Mr. Michalis 1,750 0 0 1,750
Mr. Schwab 3,000 0 0 3,000
Mr. Smith 0 0 0 0
</TABLE>
As of June 1, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares. As of that date,
the Fund had no shares issued and outstanding.
Although the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result, it may be difficult for
U.S. investors to effect service upon such persons within the U.S. or to realize
judgments of courts of the U.S. predicated upon civil liabilities of such
persons under the federal securities laws. The Trust has been advised that there
is substantial doubt as to the enforceability in the United Kingdom of such
civil remedies and criminal penalties as are afforded by the federal securities
laws. Also it is unclear if extradition treaties now in effect between the U.S.
and the United Kingdom would subject such persons to effective enforcement of
criminal penalties.
20
<PAGE>
INVESTMENT ADVISER
SCMI, 787 Seventh Avenue, New York, New York 10019, serves as investment adviser
to the Portfolio under an Investment Advisory Agreement between Schroder Core II
and SCMI. SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the
wholly owned U.S. holding subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large worldwide group of banks and financial service
companies (referred to as the "Schroder Group"), with associated companies and
branch and representative offices located in eighteen countries. The Schroder
Group specializes in providing investment management services, with funds under
management currently in excess of $150 billion as of March 31, 1997.
Under the Investment Advisory Agreement, SCMI is responsible for managing the
investment and reinvestment of the Portfolio's assets and for continuously
reviewing, supervising and administering the Portfolio's investments. In this
regard, it is the responsibility of SCMI to make decisions relating to the
Portfolio's investments and to place purchase and sale orders regarding such
investments with brokers or dealers it selects. SCMI also furnishes to the
Schroder Core II Board and the Trust Board, which has overall responsibility for
the business and affairs of the Trust, periodic reports on the investment
performance of the Portfolio and Fund.
Under the terms of the Investment Advisory Agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The Investment Advisory Agreement continues in effect provided such continuance
is approved annually: (i) by the holders of a majority of the outstanding voting
securities of the Portfolio or by the Schroder Core II Board; and (ii) by a
majority of the Trustees who are not parties to the Agreement or "interested
persons" (as defined in the 1940 Act) of any such party. The Investment Advisory
Agreement may be terminated without penalty by vote of the Trustees or the
shareholders of the Portfolio on 60 days' written notice to the investment
adviser, or by the investment adviser on 60 days' written notice to Schroder
Core II, and it terminates automatically if assigned. The Investment Advisory
Agreement also provides that, with respect to the Portfolio, neither SCMI nor
its personnel shall be liable for any error of judgment or mistake of law or for
any act or omission in the performance of its or their duties to the Portfolio,
except for willful misfeasance, bad faith or gross negligence in the performance
of its or their duties or by reason of reckless disregard of its or their
obligations and duties under the Agreement.
For providing investment advisory services to the Portfolio, SCMI is entitled to
a fee of 0.50% of the Portfolio's average daily net assets. SCMI has agreed ,
however, to waive all of the advisory fees payable by the Portfolio. SCMI has
undertaken , however, to waive all of the advisory fees payable by the
Portfolio. This undertaking cannot be withdrawn except by a majority vote of the
Trust's Board of Trustees.
The Fund currently invests all of its investable assets in the Portfolio. The
Fund may withdraw its investment from the Portfolio at any time if the Board
determines that it is in the best interests of the Fund and its shareholders to
do so. Accordingly, the Fund retains SCMI as its investment adviser to manage
the Fund's assets in the event the Fund so withdraws its investment. The
investment advisory agreement between Trust and SCMI with respect to the Fund is
the same in all material respects as the Portfolio's Investment Advisory
Agreement including the fee payable (except as to the parties, the circumstances
under which fees will be paid, and the jurisdiction whose laws govern the
agreement). During a time that the Fund did not have substantially all of its
assets invested in the Portfolio or another investment company, SCMI would be
entitled to receive an advisory fee of 0.50% of the average daily net assets of
the Fund managed directly by SCMI.
ADMINISTRATIVE SERVICES
On behalf of the Fund, the Trust has entered into an Administration Agreement
with Schroder Advisors, 787 Seventh Avenue, New York, New York 10019. Under the
Administration Agreement, Schroder Advisors provides management and
administrative services necessary for the operation of the Fund, including: (i)
preparation of shareholder reports and communications; (ii) regulatory
compliance, such as reports to and filings with the SEC (and state securities
commissions); and (iii) general supervision of the operation of the Fund,
including coordination
21
<PAGE>
of the services performed by the Fund's investment adviser, if any, transfer
agent, custodian, independent accountants, legal counsel and others. Schroder
Advisors is a wholly owned subsidiary of SCMI and is a registered broker-dealer
organized to act as administrator and distributor of mutual funds.
For providing administrative services to the Fund, Schroder Advisors is entitled
to receive a fee, payable monthly, at the annual rate of 0.05% of the Fund's
average daily net assets. The Administration Agreement is terminable with
respect to the Fund without penalty, at any time, by the Trust Board, upon 60
days' written notice to Schroder Advisors or by Schroder Advisors upon 60 days'
written notice to the Trust.
The Trust has entered into a Subadministration Agreement with Forum. Under the
Subadministration Agreement, Forum assists Schroder Advisors with certain of its
responsibilities under the Administration Agreement, including shareholder
reporting and regulatory compliance. Under the Subadministration Agreement,
Forum is entitled to a fee at the annual rate of 0.075% of the average daily net
assets. The Subadministration Agreement is terminable with respect to the Fund
without penalty, at any time, by the Trust Board, upon 60 days' written notice
to Forum or by Forum upon 60 days' written notice to the Trust.
Under administration and subadministration agreements with Schroder Core II,
Schroder Advisors and Forum provide similar services to the Portfolio for which
each is separately entitled to compensation at the annual rates of 0.10% and
0.075%, respectively, of the average daily net assets of the Portfolio.
Accordingly, the fees paid by the Fund and Portfolio to SCMI and Schroder
Advisors may equal up to 0.65% of the Fund's average daily net assets. The
Portfolio's administration and subadministration agreements are the same in all
material respects as the Fund's respective agreements (except as to the parties,
the circumstances under which fees will be paid, the fees payable thereunder,
and the jurisdiction whose laws govern the agreement).
DISTRIBUTION OF FUND SHARES
Schroder Advisors, 787 Seventh Avenue, New York, New York 10019, serves as
Distributor of the Fund shares pursuant to a Distribution Agreement. Schroder
Advisors is a wholly owned subsidiary of Schroders Incorporated, the parent
company of SCMI, and is a registered broker-dealer organized to act as
administrator and/or distributor of mutual funds.
Under the Distribution Agreement, Schroder Advisors has agreed to use its best
efforts to secure purchases of Fund shares in jurisdictions in which such shares
may be legally offered for sale. Schroder Advisors is not obligated to sell any
specific amount of Fund shares. Further, Schroder Advisors has agreed in the
Distribution Agreement to serve without compensation and, except as provided
under a Distribution Plan approved with respect to Advisor shares, to pay from
its own resources all costs and expenses incident to the sale and distribution
of Fund shares including expenses for printing and distributing prospectuses and
other sales materials to prospective investors, advertising expenses, and the
salaries and expenses of its employees or agents in connection with the
distribution of Fund shares.
Under a Distribution Plan (the "Plan") adopted by the Fund with respect to
Advisor Shares only, the Trust may pay directly or may reimburse the investment
adviser or a broker-dealer registered under the Securities Exchange Act of 1934
(the "1934 Act") (the investment adviser or such registered broker-dealer, if so
designated, being a "Distributor" of the Fund's shares) monthly (subject to a
limit of 0.50% per annum of the Fund's average daily net assets) for: (i)
advertising expenses including advertising by radio, television, newspapers,
magazines, brochures, sales literature or direct mail; (ii) costs of printing
prospectuses and other materials to be given or sent to prospective investors;
(iii) expenses of sales employees or agents of the Distributor, including
salary, commissions, travel, and related expenses in connection with the
distribution of Fund shares; and (iv) payments to broker-dealers (other than the
Distributor) or other organizations for services rendered in the distribution of
the Fund's shares, including payments in amounts based on the average daily
value of Fund shares owned by shareholders in respect of which the broker-dealer
or organization has a distributing relationship. No payments may be made under
the Plan until the Trust Board so authorizes. Any payment made pursuant to the
Plan is contingent upon the Trust Board's approval. The Fund is not liable for
distribution expenditures of the Distributor in any given year in excess of the
maximum amount (0.50% per annum of the Fund's average daily net assets) payable
under the Plan in that year.
22
<PAGE>
Salary expenses of sales staff responsible for marketing shares of the Fund may
be allocated among various series of the Trust that have adopted a Plan similar
to that of the Fund on the basis of average net assets; travel expenses are
allocated among the series of the Trust. The Trust Board has concluded that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
Without shareholder approval, the Plan may not be amended to increase materially
the costs that the Fund may bear. Other material amendments to the Plan must be
approved by the Trust Board, and by the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any related
agreement, by vote cast in person at a meeting called for the purpose of
considering such amendments. The selection and nomination of the Trustees of the
Trust has been committed to the discretion of the Trustees who are not
"interested persons" of the Trust. The Plan has been approved, and is subject to
annual approval, by the Trust Board and by the Trustees who are not "interested
persons" and have no direct or indirect financial interest in the operation of
the Plan, by vote cast in person at a meeting called for the purpose of voting
on the Plan. The Plan is terminable with respect to the Fund at any time by a
vote of a majority of the Trustees who are not "interested persons" of the Trust
and who have no direct or indirect financial interest in the operation of the
Plan or by vote of the holders of a majority of the shares of the Fund
SERVICE ORGANIZATIONS
The Trust may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services with respect to Advisor Shares of the Fund. The Fund may
pay fees (which vary depending upon the services provided) to Service
Organizations in amounts up to an annual rate of 0.25% of the daily net asset
value of the Fund's Advisor Shares owned by shareholders with whom the Service
Organization had a servicing relationship. Services provided by Service
Organizations may include: (i) providing personnel and facilities necessary to
establish and maintain certain shareholder accounts and records; (ii) assisting
in processing purchase and redemption transactions; (iii) arranging for the
wiring of funds; transmitting and receiving funds in connection with client
orders to purchase or redeem shares; (iv) verifying and guaranteeing client
signatures in connection with redemption orders, transfers among and changes in
client-designated accounts; (v) providing periodic statements of a client's
account balances and, to the extent practicable, integrating such information
with other client transactions; (vi) furnishing periodic and annual statements
and confirmations of all purchases and redemptions of shares in a client's
account; (vii) transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Fund to clients; and (viii) such
other services as the Fund or a client reasonably may request, to the extent
permitted by applicable statute, rule or regulation. Neither SCMI nor Schroder
Advisors is a Service Organization nor receives fees for servicing. The Fund has
no intention of making any such payments to Service Organizations with respect
to accounts of Investor Shares.
Some Service Organizations could impose additional or different conditions on
their clients, such as requiring them to invest more than the minimum
investments specified by the Fund or charging a direct fee for servicing. If
imposed, these fees would be in addition to any amounts that might be paid to
the Service Organization by the Fund. Each Service Organization would agree to
transmit to its clients a schedule of any such fees. Shareholders using Service
Organizations would be urged to consult them regarding any such fees or
conditions.
The Glass-Steagall Act and other applicable laws provide that banks may not
engage in the business of underwriting, selling or distributing securities.
There currently is no precedent prohibiting banks from performing administrative
and shareholder servicing functions as Service Organizations. However, judicial
or administrative decisions or interpretations of such laws, as well as changes
in either federal or state statutes or regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, could prevent a bank
service organization from continuing to perform all or a part of its servicing
activities. If a bank were prohibited from so acting, its shareholder clients
would be permitted to remain shareholders of the Fund and alternative means for
continuing the servicing of such shareholders would be sought. In that event,
changes in the operation of the Fund might occur and a shareholder serviced by
such a bank might no longer be able to avail itself of any services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
23
<PAGE>
PORTFOLIO ACCOUNTING
Forum Accounting Services, Limited Liability Company ("FAS, LLC"), an affiliate
of Forum, performs portfolio accounting services for the Fund pursuant to a Fund
Accounting Agreement with the Trust. The Accounting Agreement is terminable with
respect to the Fund without penalty, at any time, by the Trust Board, upon 60
days' written notice to FAS, LLC or by FAS, LLC upon 60 days' written notice to
the Trust.
Under the Accounting Agreement, FAS, LLC prepares and maintains the books and
records of the Fund, on behalf of the Trust, that are required to be maintained
under the 1940 Act; calculates the net asset value per share of the Fund,
calculates dividends and capital gain distributions; and prepares periodic
reports to shareholders and the SEC. For its services to the Fund, FAS, LLC is
entitled to receive from the Trust a fee of $36,000 per year plus $12,000 per
year for each class of the Fund above one. FAS, LLC is entitled to be paid an
additional $24,000 per year with respect to global and international funds. FAS,
LLC also is entitled to be paid an additional $12,000 per year with respect to
tax-free money market funds, funds with more than 25% of their total assets
invested in asset backed securities, funds that have more than 100 security
positions, or funds that have a monthly portfolio turnover rate of 10% or
greater.
FAS, LLC is required to use its best judgment and efforts in rendering fund
accounting services and is not liable to the Trust for any action or inaction in
the absence of bad faith, willful misconduct or gross negligence. FAS, LLC is
not responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control. The Trust has agreed to indemnify
and hold harmless FAS, LLC and its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and all other
expenses arising out of or in any way related to FAS, LLC's actions taken or
failures to act with respect to a Fund or based, if applicable, upon
information, instructions or requests with respect to a Fund given or made to
FAS, LLC by an officer of the Trust duly authorized. This indemnification does
not apply to FAS, LLC's actions taken or failures to act in cases of FAS, LLC's
own bad faith, willful misconduct or gross negligence.
FEES AND EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by Schroder Advisors or SCMI, including those expenses it indirectly
bears through its investment in the Portfolio. The costs borne by the Fund
include include its pro rata share of Portfolio expenses including advisory
fees; legal and accounting expenses; Trustees' fees and expenses; insurance
premiums, custodian and transfer agent fees and expenses; brokerage fees and
expenses; expenses of registering and qualifying the Fund's shares for sale with
the SEC and with various state securities commissions; expenses of obtaining
quotations on portfolio securities, if any, and pricing of the Fund's shares; a
portion of the expenses of maintaining the Fund's legal existence and of
shareholders' meetings; expenses of preparation and distribution to existing
shareholders of reports, proxies and prospectuses; and a proportionate amount of
the total operating expenses of the Portfolio, including advisory fees paid to
SCMI. Trust expenses directly attributed to the Fund or a class thereof are
charged to the Fund or class; other expenses are allocated proportionately among
all the series of the Trust in relation to the net assets of each series. From
time to time, SCMI, Schroder Advisors,Forum, or FAS, LLC voluntarily may waive
all or a portion of its respective fees.
PORTFOLIO TRANSACTIONS
The following discussion with respect to the Fund is applicable to the Portfolio
in connection with any portfolio holdings. References to the Fund are to the
Fund or Portfolio as the context requires.
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment advisory clients
of SCMI are made to achieve their respective investment objectives. Investment
decisions are the product of many factors in addition to basic suitability for
the particular client involved and a particular security may be bought or sold
for certain clients and
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not bought or sold for other clients. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling the
security. In some instances, one client may sell a particular security to
another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event each day's
transactions in such security are, insofar as is possible, averaged as to price
and allocated between such clients in a manner which in SCMI's opinion is
equitable to each and in accordance with the amount being purchased or sold by
each. There may be circumstances when purchases or sales of portfolio securities
for one or more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among brokers. Also, a particular broker may charge different commissions
according to the difficulty and size of transactions. Transactions in foreign
securities generally involve the payment of fixed brokerage commissions, which
are generally higher than those in the U.S. Since most brokerage transactions
for the Fund will be placed with foreign broker-dealers, certain portfolio
transaction costs for the Fund may be higher than fees for similar transactions
executed on U.S. securities exchanges. There is generally no stated commission
in the case of securities traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
The Investment Advisory Agreement authorizes and directs SCMI to place orders
for the purchase and sale of the portfolio investments with brokers or dealers
it selects and to seek "best execution" of such portfolio transactions. SCMI
places all such orders for the purchase and sale of portfolio securities and
buys and sells securities for the Fund through a substantial number of brokers
and dealers. In so doing, SCMI uses its best efforts to obtain for the Fund the
most favorable price and execution available. The Fund may, however, pay higher
than the lowest available commission rates when SCMI believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction. In seeking the most favorable price and
execution, SCMI considers all factors it deems relevant (including price, size
of transaction, the nature of the market for the security, amount of the
commission, the timing of the transaction taking into account market prices and
trends, reputation, experience and financial stability of the broker-dealers
involved and the quality of service rendered by the broker-dealers in other
transactions).
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the U.S., for advisers of
investment companies and other institutional investors to receive research
services from broker-dealers that execute portfolio transactions for the clients
of such advisers. Consistent with this practice, SCMI may receive research
services from broker-dealers with which SCMI places the Fund's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such items as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services are of value to
SCMI in advising various of its clients (including the Fund), although not all
of these services are necessarily useful and of value in managing the Fund. The
management fee paid by the Fund is not reduced because SCMI and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, SCMI may
cause the Fund to pay a broker-dealer that provides "brokerage and research
services" (as defined in the 1934 Act) to SCMI an amount of disclosed commission
for effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
Subject to the general policies of the Portfolio regarding allocation of
portfolio brokerage as set forth above, the Schroder Core II Board has
authorized SCMI to employ: (i) Schroder Wertheim & Company, Incorporated
("Schroder Wertheim") an affiliate of SCMI, to effect securities transactions of
the Portfolio on the New York Stock Exchange only; and (ii) Schroder Securities
Limited and its affiliates (collectively, {"Schroder Securities"), affiliates of
SCMI, to effect securities transactions of the Portfolio on various foreign
securities exchanges on which Schroder Securities has trading privileges,
provided certain other conditions are satisfied as described below.
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Payment of brokerage commissions to Schroder Wertheim or Schroder Securities for
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on securities
exchanges paid by a registered investment company to a broker which is an
affiliated person of such investment company (or an affiliated person of another
person so affiliated) not exceed the usual and customary broker's commissions
for such transactions. It is the Fund's policy that commissions paid to Schroder
Wertheim or Schroder Securities will in SCMI's judgment be: (i) at least as
favorable as commissions contemporaneously charged by Schroder Wertheim Schroder
Securities on comparable transactions for its most favored unaffiliated
customers; and (ii) at least as favorable as those that would be charged on
comparable transactions by other qualified brokers having comparable execution
capability. The Trust Board, including a majority of the Trustees who are not
interested persons, has adopted procedures pursuant to Rule 17e-l under Section
17(e) to ensure that commissions paid to Schroder Securities by the Fund satisfy
the foregoing standards. The Trust Board will review all transactions at least
quarterly for compliance with these procedures.
It is further a policy of the Portfolio that all such transactions effected for
the Portfolio by Schroder Wertheim on the New York Stock Exchange be in
accordance with Rule 11a 2-2(T) under the 1934 Act, which requires in substance
that a member of such exchange not associated with Schroder Wertheim actually
execute the transaction on the exchange floor or through the exchange
facilities. Thus, while Schroder Wertheim will bear responsibility for
determining important elements of execution such as timing and order size,
another firm will actually execute the transaction.
Schroder Wertheim pays a portion of the brokerage commissions it receives from
the Portfolio to the brokers executing the Portfolio's transactions on the New
York Stock Exchange. In accordance with Rule 11a 22-2(T), Schroder Core II has
entered into an agreement with Schroder Wertheim permitting it to retain a
portion of the brokerage commissions paid to it by the Portfolio. This agreement
has been approved by the Schroder Core Board II, including a majority of the
non-interested Trustees.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder Wertheim and will not direct brokerage to Schroder
Wertheim in recognition of research services.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DETERMINATION OF NET ASSET VALUE PER SHARE
The net asset value per share of the Fund is determined as of 4:00 p.m. (Eastern
time) each day the New York Stock Exchange (the "Exchange") is open by dividing
the value of the net assets allocated to a class of the Fund by the total number
of outstanding shares of that class. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the afternoon of valuation. The Exchange's most recent holiday schedule
(which is subject to change) states that it will close on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Schroder Core II Board has established procedures for the valuation of the
Portfolio's securities: (i) equity securities listed or traded on the New York
or American Stock Exchange or other domestic or foreign stock exchange are
valued at their latest sale prices on such exchange that day prior to the time
when assets are valued; in the absence of sales that day, such securities are
valued at the mid-market prices (in cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by the Fund's investment adviser); (ii) unlisted equity
securities for which over-the-counter market quotations are readily available
are valued at the latest available mid-market prices prior to the time of
valuation; (iii) securities (including restricted securities) not having
readily-available market quotations are valued at fair value under the Schroder
Core II Board's procedures; (iv) debt securities having a maturity in excess of
60 days are valued at the mid-market prices determined by a portfolio pricing
service or obtained from active market makers on the basis of reasonable
inquiry; and (v) short-term debt securities (having a remaining maturity of 60
days or less) are valued at cost, adjusted for amortization of premiums and
accretion of discount.
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Puts, calls and Stock Index Futures are valued at the last sales price on the
principal exchange on which they are traded, or, if there are no transactions,
in accordance with (i) above. When the Fund writes an option, an amount equal to
the premium received by the Fund is recorded in the Fund's books as an asset,
and an equivalent deferred credit is recorded as a liability. The deferred
credit is adjusted ("marked-to-market") to reflect the current market value of
the option.
Detailed information pertaining to the purchase of shares of the Fund,
redemption of shares and the determination of the net asset value of Fund shares
is set forth in the Prospectus under "Investment in the Fund".
REDEMPTION IN-KIND
In the event that payment for redeemed shares is made wholly or partly in
portfolio securities, the shareholder may incur brokerage costs in converting
the securities to cash. An in-kind distribution of portfolio securities is
generally less liquid than cash. The shareholder may have difficulty finding a
buyer for portfolio securities received in payment for redeemed shares.
Portfolio securities may decline in value between the time of receipt by the
shareholder and conversion to cash. A redemption in-kind of the portfolio
securities could result in a less diversified portfolio of investments for the
Portfolio and could affect adversely the liquidity of the investment portfolio
of the Portfolio.
TAXATION
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company the Fund intends to distribute to shareholders at
least 90% of its net investment income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over net
long-term capital losses), and to meet certain diversification of asset, source
of income, and other requirements of the Code. By so doing, the Fund will not be
subject to federal income tax on its net investment income and net realized
capital gains (the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders. If the Fund does not meet all of
these Code requirements, it will be taxed as an ordinary corporation, and its
distributions will be taxable to shareholders as ordinary income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a 4% nondeductible excise tax. To
prevent imposition of the excise tax, the Fund must distribute for each calendar
year an amount equal to the sum of: (i) at least 98% of its ordinary income
(excluding any capital gains or losses) for the calendar year; (ii) at least 98%
of the excess of its capital gains over capital losses realized during the
one-year period ending April 30, of such year; and (iii) all such ordinary
income and capital gains for previous years that were not distributed during
such years. A distribution will be treated as paid during the calendar year if
it is declared by the Fund in October, November or December of the year with a
record date in such month and paid by the Fund during January of the following
year. Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than in the calendar year in which
the distributions are received.
Under the Code, gains or losses attributable to exchange rate fluctuations that
occur between the time the Fund accrues interest (or other receivable) or
expenses (or other liabilities) denominated in a foreign currency and the time
the Fund actually collects such receivable or pays such liabilities generally
are treated as ordinary income or ordinary loss. Similarly, gains or losses on
disposition, of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition as well as gains or
losses from certain foreign currency transactions and options on certain foreign
currency transactions, generally are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's net investment income to be
distributed to its shareholders as ordinary income.
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Generally, the hedging transactions undertaken by the Fund may be deemed
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains or losses realized by the Fund. In addition, losses realized
by the Fund on positions that are part of a straddle may be deferred under the
straddle rules rather than being taken into account in calculating the taxable
income for the taxable year in which the losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Fund that is taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the Code that are
applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or
long-term capital gain may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
The requirements applicable to regulated investment companies such as the Fund
may limit the extent to which the Fund will be able to engage in transactions in
options and forward contracts.
Distributions of net investment income (including realized net short-term
capital gain) are taxable to shareholders as ordinary income. It is not expected
that such distributions will be eligible for the dividends-received deduction
available to corporations.
Distributions of net long-term capital gain are taxable to shareholders as
long-term capital gain, regardless of the length of time the Fund shares have
been held by a shareholder, and are not eligible for the dividends received
deduction. A loss realized by a shareholder on the sale of shares of the Fund
with respect to which capital gain dividends have been paid will, to the extent
of such capital gain dividends, be treated as long-term capital loss (even
though such shares may have been held by the shareholder for one year or less).
Further, a loss realized on a disposition will be disallowed to the extent the
shares disposed of are replaced (whether by reinvestment or distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
All distributions are taxable to the shareholder whether reinvested in
additional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Shareholders will be notified annually as to the
federal tax status of distributions.
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will receive a distribution which will nevertheless
be taxable to them.
Upon redemption or sale of his shares, a shareholder will realize a taxable gain
or loss depending upon his basis in his shares. Such gain or loss generally will
be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. Such gain or loss generally will be long-term or short-term
depending upon the shareholder's holding period for the shares.
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The Fund intends to minimize foreign income and withholding taxes by investing
in obligations the payments with respect to which will be subject to minimal or
no such taxes (insofar as this objective is consistent with the Fund's income
objective). However, since the Fund may incur foreign taxes, it intends, if it
is eligible to do so, to elect under Section 853 of the Code to treat each
shareholder as having received an additional distribution from the Fund, in the
amount indicated in a notice furnished to him, as his pro rata portion of income
taxes paid to or withheld by foreign governments with respect to interest,
dividends and gains on the Fund's foreign portfolio investments. The shareholder
then may take the amount of such foreign taxes paid or withheld as a credit
against his federal income tax, subject to certain limitations. If the
shareholder finds it more to his advantage to do so, he may, in the alternative,
deduct the foreign tax withheld as an itemized deduction in computing his
taxable income. Each shareholder is referred to his tax adviser with respect to
the availability of the foreign tax credit.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions and gross proceeds from the redemption of Fund shares, except
in the case of certain exempt shareholders. All such distributions and proceeds
generally will be subject to withholding of federal income tax at a rate of 31%
("backup withholding") in the case of nonexempt shareholders if: (i) the
shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number or social security number; (ii) the IRS
notifies the Fund that the shareholder has failed to report certain interest and
dividend income to the IRS and to respond to notices to that effect; or (iii)
when required to do so, the shareholder fails to certify that he is not subject
to backup withholding. If the withholding provisions are applicable, any such
distributions or proceeds, whether reinvested in additional shares or taken in
cash, will be reduced by the amount required to be withheld. Any amounts
withheld may be credited against the shareholder's federal income tax liability.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. persons (I.E., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Fund also may be subject
to state and local taxes, and their treatment under state and local income tax
laws may differ from the federal income tax treatment. Shareholders should
consult their tax advisors with respect to particular questions of federal,
state and local taxation. Shareholders who are not U.S. persons should consult
their tax advisors regarding U.S. and foreign tax consequences of ownership of
shares of the Fund including the likelihood that distributions to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower rate under a tax
treaty).
OTHER INFORMATION
ORGANIZATION
The Trust was originally organized as a Maryland corporation on July 30, 1969.
On February 29, 1988, the Trust was recapitalized to enable the Trust Board to
establish a series of separately managed investment portfolios, each having a
different investment objective and policies. At the time of the
recapitalization, the Trust's name was changed from "The Cheapside Dollar Fund
Limited" to "Schroder Capital Funds, Inc." On January 9, 1996, the Trust was
reorganized as a Delaware business trust. At that time, the Trust's name was
changed from "Schroder Capital Funds, Inc." to its present name. The Trust is
registered as an open-end management investment company under the Act.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private,
for-profit corporations. The securities regulators of some states, however, have
indicated that they and the courts in their state may decline to apply Delaware
law on this point. To guard against this risk, the Trust Instrument contains an
express disclaimer of shareholder liability for the debts, liabilities,
obligations, and expenses of the Trust. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Delaware law does not apply (or no contractual limitation
of liability was in effect) and the series is unable to meet its obligations.
Forum believes that, in view of the above, there is no risk of personal
liability to shareholders.
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CAPITALIZATION AND VOTING
The Trust has an unlimited number of shares of beneficial interest. The Trust
Board may, without shareholder approval, divide the authorized shares into an
unlimited number of separate series (such as the Fund) and may divide series
into classes of shares, and the costs of doing so will be borne by the Trust.
The Trust currently consists of five separate series, each of which has a
separate investment objective and policies, and two classes, Investor Shares and
Advisor Shares, in each series.
When issued for the consideration or in accordance with the dividend
reinvestment plan described in the Prospectus, Fund shares are fully paid,
nonassessable, and have no preferences as to conversion, exchange, dividends,
retirement or other features. Shares have no preemptive rights and have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees if
they choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held. Shares of each class
vote separately to approve investment advisory agreements or changes in
investment objectives and other fundamental policies affecting the series to
which they pertain, but all classes vote together in the election of Trustees
and ratification of the selection of independent accountants. Shareholders of
any particular class are not be entitled to vote on any matters as to which such
class are not directly affected.
The Trust will not hold annual meetings of shareholders. The matters considered
at an annual meeting typically include the reelection of Trustees, approval of
an investment advisory agreement, and the ratification of the selection of
independent accountants. These matters will not be submitted to shareholders
unless a meeting of shareholders is held for some other reason, such as those
indicated below. Each of the Trustees will serve until death, resignation or
removal. Vacancies will be filled by the remaining Trustees, subject to the
provisions of the 1940 Act requiring a meeting of shareholders for election of
Trustees to fill vacancies when less than a majority of Trustees then in office
have been elected by shareholders. Similarly, the selection of accountants and
renewal of investment advisory agreements for future years will be performed
annually by the Trust Board. Future shareholder meetings will be held to elect
Trustees if required by the 1940 Act, to obtain shareholder approval of changes
in fundamental investment policies, to obtain shareholder approval of material
changes in investment advisory agreements, to select new accountants if the
employment of the Trust's accountants has been terminated, and to seek any other
shareholder approval required under the 1940 Act. The Trust Board has the power
to call a meeting of shareholders at any time when it believes it is necessary
or appropriate. In addition, the Trust Instrument provides that a special
meeting of shareholders may be called at any time for any purpose by the holders
of at least 10% of the outstanding shares entitled to be voted at such meeting.
In addition to the foregoing rights, the Trust Instrument provides that holders
of at least two-thirds of the outstanding shares of the Trust may remove any
person serving as a Trustee either by declaration in writing or at a meeting
called for such purpose. Further, the Trust Board is required to call a
shareholders meeting for the purpose of considering the removal of one or more
Trustees if requested in writing to do so by the holders of not less than 10% of
the outstanding shares of the Trust. In addition, the Trust Board is required,
if requested in writing to do so by ten or more shareholders of record (who have
been such for at least six months), holding in the aggregate the lesser of: (i)
shares of the Trust having a total net asset value of at least $25,000; or (ii)
1% of the outstanding shares of the Trust, to help such holders communicate with
other shareholders of the Trust with a view to obtaining the requisite
signatures to request a special meeting to consider Trustee removal.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of its average annual total
return in advertisements or reports to shareholders or prospective investors.
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Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of 1, 5 and 10 years, calculated pursuant to the following
formula:
P(1+T)n=ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n= the number of years, and ERV is the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of Fund expenses (net of certain
reimbursed expenses) on an annual basis, and will assume that all dividends and
distributions are reinvested when paid.
Quotations of total return will reflect only the performance of a hypothetical
investment in the Fund during the particular time period shown. Total return for
the Fund will vary based on changes in market conditions and the level of the
Fund's expenses, and no reported performance figure should be considered an
indication of future performance. Total return will be calculated separately for
each class of the Fund.
In connection with communicating total return to current or prospective
investors, the Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to other unmanaged
indexes that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Investors who purchase and redeem shares of the Fund through a customer account
maintained at a Service Organization may be charged one or more of the following
types of fees as agreed upon by the Services Organization and the investor, with
respect to the customer services provided by the Service Organization: account
fees (a fixed amount per month or per year); transaction fees (a fixed amount
per transaction processed); compensating balance requirements (a minimum dollar
amount a customer must maintain in order to obtain the services offered); or
account maintenance fees (a periodic charge based upon a percentage of the
assets in the account or of the dividends paid on these assets). Such fees will
have the effect of reducing the average annual total return of the Fund for
those investors.
CUSTODIAN
The Chase Manhattan Bank, through its Global Custody Division located in London,
England, acts as custodian of the Fund's assets but plays no role in making
decisions as to the purchase or sale of portfolio securities for the Fund or
Portfolio. Pursuant to rules adopted under the 1940 Act, the Fund or Portfolio
may maintain its foreign securities and cash in the custody of certain eligible
foreign banks and securities depositories. Selection of these foreign custodial
institutions is made by the Trust Board and Schroder Core II Board following a
consideration of a number of factors, including (but not limited to) the
reliability and financial stability of the institution; the ability of the
institution to capably perform custodial services, the reputation of the
institution in its national market; the political and economic stability of the
country in which the institution is located; and further risks of potential
nationalization or expropriation of portfolio securities and other assets held
in that country.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp., P.O. Box 446, Portland, Maine 04112, acts as the Fund's
transfer agent and dividend disbursing agent.
LEGAL COUNSEL
Ropes & Gray, One International Place, Boston, Massachucetes 02110-2624, counsel
to the Fund, passes upon certain legal matters in connection with the shares
offered by the Funds.
INDEPENDENT AUDITORS
COOPERS & LYBRAND, L.L.P. serves as independent accountants for the Fund.
Coopers & Lybrand, L.L.P. provides audit services and consultation in connection
with review of U.S. SEC filings. Coopers & Lybrand, L.L.P.'s address is One Post
Office Square, Boston, Massachusetts 02109.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the SEC under the 1933 Act with
respect to the securities offered hereby, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the SEC in Washington, D.C. or on their web site at www.sec.gov.
Statements contained herein and in the prospectuses as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The fiscal year end of the Fund is December 31. Financial statements for the
Fund's semi-annual period and fiscal year will be distributed to shareholders of
record. The Board in the future may change the fiscal year end of the Fund.
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APPENDIX
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE
FIXED-INCOME SECURITY RATINGS
"Aaa" Fixed-income securities which are rated "Aaa" are judged to be
of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" Fixed-income securities which are rated "Aa" are judged to be of
high quality by all standards. Together with the "Aaa" group
they comprise what are generally known as high grade
fixed-income securities. They are rated lower than the best
fixed-income securities because margins of protection may not be
as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
The ratings apply to municipal commercial paper as well as taxable commercial
paper. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
"Prime-1", "Prime-2", "Prime-3".
Issuers rated "Prime-1" have a superior capacity for repayment of short-term
promissory obligations. Issuers rated "Prime-2" have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated "Prime-3" have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated "Not Prime" do not fall within any of the Prime rating categories.
STANDARD AND POOR'S
FIXED-INCOME SECURITY RATINGS
An S&P fixed-income security rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. The ratings are based, in
varying degrees, on the following considerations: (i) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligation; (ii) nature of and provisions of the obligation; and (iii)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
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"AAA" Fixed-income securities rated "AAA" have the highest rating
assigned by S&P. Capacity to pay interest and repay principal is
extremely strong.
"AA" Fixed-income securities rated "AA" have a very strong capacity to
pay interest and repay principal and differs from the highest-
rated issues only in small degree.
COMMERCIAL PAPER RATINGS
S&P commercial paper rating is a current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. The
commercial paper rating is not a recommendation to purchase or sell a security.
The ratings are based upon current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. The ratings may be
changed, suspended, or withdrawn as a result of changes in or unavailability of
such information. Ratings are graded into group categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper.
Issues assigned "A" ratings are regarded as having the greatest capacity for
timely payment. Issues in this category are further refined with the designation
"1", "2", and "3" to indicate the relative degree of safety.
"A-1" Indicates that the degree of safety regarding timely payment is
very strong.
"A-2" Indicates capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety
is not as overwhelming as for issues designated "A-1".
"A-3" Indicates a satisfactory capacity for timely payment.
Obligations carrying this designation are, however, somewhat
more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
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