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SCHRODER EMERGING MARKETS FUND INSTITUTIONAL PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997, AS AMENDED APRIL 15, 1997
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INVESTMENT ADVISER
Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUBADMINISTRATOR
Forum Administrative Services, Limited Liability Company ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder Emerging Market Fund Institutional Portfolio (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
herein). Advisor Shares incur more expenses than Investor Shares. The Fund
imposes both purchase and redemption charges on investments. Please see the
Prospectuses for further information.
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 Prospectus dated March 1, 1997, as amended 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
printed above.
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TABLE OF CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . 3
Convertible Securities. . . . . . . . . . . . . . . . . . . . . 3
Debt-to-Equity Conversions. . . . . . . . . . . . . . . . . . . 3
U.S. Government Securities. . . . . . . . . . . . . . . . . . . 3
Bank Obligations. . . . . . . . . . . . . . . . . . . . . . . . 4
Short-Term Debt Securities. . . . . . . . . . . . . . . . . . . 4
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . 4
Illiquid and Restricted Securities. . . . . . . . . . . . . . . 5
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . 5
Forward Foreign Currency Exchange Contracts . . . . . . . . . . 5
Options and Futures Transactions. . . . . . . . . . . . . . . . 6
Warrants and Stock Rights . . . . . . . . . . . . . . . . . . .15
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . .15
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . .16
Officers and Trustees . . . . . . . . . . . . . . . . . . . . .16
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . .18
Administrative Services . . . . . . . . . . . . . . . . . . . .19
Distribution of Fund Shares . . . . . . . . . . . . . . . . . .20
Service Organizations . . . . . . . . . . . . . . . . . . . . .21
Portfolio Accounting. . . . . . . . . . . . . . . . . . . . . .22
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . .23
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . .23
Investment Decisions. . . . . . . . . . . . . . . . . . . . . .23
Brokerage and Research Services . . . . . . . . . . . . . . . .23
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . .25
Determination of Net Asset Value Per Share. . . . . . . . . . .25
Redemption In-Kind. . . . . . . . . . . . . . . . . . . . . . .25
TAXATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .28
Organization. . . . . . . . . . . . . . . . . . . . . . . . . .28
Capitalization and Voting . . . . . . . . . . . . . . . . . . .29
Principal Shareholders. . . . . . . . . . . . . . . . . . . . .30
Performance Information . . . . . . . . . . . . . . . . . . . .30
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Transfer Agent and Dividend Disbursing Agent. . . . . . . . . .31
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . .31
Independent Accountant. . . . . . . . . . . . . . . . . . . . .31
Registration Statement. . . . . . . . . . . . . . . . . . . . .31
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . .32
APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
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INTRODUCTION
Schroder Emerging Markets Fund Institutional Portfolio is a non-diversified,
separately managed series of Schroder Capital Funds (Delaware) (the "Trust"), an
open-end management investment company currently consisting of five separate
series, each of which has a different investment objective and policies.
The Fund's investment objective is to achieve long-term capital appreciation
through direct or indirect investment in equity and debt securities of issuers
domiciled or doing business in emerging market countries in regions such as
Southeast Asia, Latin America, and Eastern and Southern Europe. There is no
assurance that the Fund will achieve this objective. Furthermore, investing in
securities of emerging market issuers involves special risks in addition to
those associated with investments in securities of U.S. issuers.
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 as identified
under "Investment Objective" and "Investment Policies" in the Prospectus. The
following information supplements the discussion found in those sections by
providing additional information or elaborating upon the discussion there. The
Fund currently seeks to achieve its investment objective by holding, as its only
investment securities, the securities of Schroder Emerging Markets Fund
Institutional Portfolio (the "Portfolio"), a separate series of Schroder Capital
Funds ("Schroder Core"). 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 are discussed with respect to the
Portfolio only.
CONVERTIBLE SECURITIES
The Portfolio may invest in convertible preferred stocks and convertible debt
securities ("convertible securities"). A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Convertible securities rank senior to common stocks in a corporation's capital
structure and, therefore, carry less risk than the corporation's common stock.
The value of a convertible security is a function of its "investment value" (its
value as if it did not have a conversion privilege), and its "conversion value"
(the security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
DEBT-TO-EQUITY CONVERSIONS
The Portfolio may invest up to 5% of its net assets in debt-to-equity
conversions. Debt-to-equity conversion programs are sponsored in varying
degrees by certain emerging market countries, particularly in Latin America, and
permit investors to use external debt of a country to make equity investments in
local companies. Many conversion programs relate primarily to investments in
transportation, communication, utilities and similar infrastructure-related
areas. The terms of the programs vary from country to country, but include
significant restrictions on the application of proceeds received in the
conversion and on the repatriation of investment profits and capital. When
inviting conversion applications by holders of eligible debt, a government
usually specifies the minimum discount from par value that it will accept for
conversion. SCMI believes that debt-to-equity conversion programs may offer
investors opportunities to invest in otherwise restricted equity securities that
have a potential for significant capital appreciation and intends to invest
assets of the Portfolio to a limited extent in such programs under appropriate
circumstances. There can be no assurance that debt-to-equity conversion
programs will continue to be successful or that the Portfolio will be able to
convert all or any of its emerging market debt portfolio into equity
investments.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in securities issued or guaranteed by the U.S.
Government (or its agencies, instrumentalities or government-sponsored
enterprises) that have remaining maturities not exceeding one year.
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Agencies, instrumentalities and government sponsored enterprises that have been
established or sponsored by the U.S. Government and issue or guarantee debt
securities 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, instrumentalities or
government-sponsored enterprises referred to above are 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) whose total assets at the time of purchase
exceed $1 billion. Such banks must be members of the Federal Deposit Insurance
Corporation. The Portfolio also may hold cash and time deposits denominated in
any major currency in foreign banks.
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. A time deposit is a non-negotiable
receipt issued by a bank in exchange for the deposit of funds. Similar to a
certificate of deposit, a time deposit earns a specified rate of interest over a
definite time period; however, it cannot be traded in the secondary markets.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper -- short-term unsecured promissory
notes issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Portfolio for temporary
defensive purposes consists of direct obligations of domestic issuers that at
the time of investment are rated "P-1" by Moody's Investors Service ("Moody's")
or "A-1" by Standard & Poor's ("S&P"), or securities that, if not rated, are
issued by companies having an outstanding debt issue currently rated "Aaa" or
"Aa" by Moody's or "AAA" or "AA" by S&P. The rating "P-1" is the highest
commercial paper rating assigned by Moody's and the rating "A-1" is the highest
commercial paper rating assigned by S&P. 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.
REPURCHASE AGREEMENTS
The Portfolio may invest in securities subject to repurchase agreements that
mature or may be terminated by notice in seven days or less with U.S. banks or
broker-dealers. In a typical repurchase agreement the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate effective for the period
the buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. SCMI monitors the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to insure that the value of the
security always equals or exceeds the repurchase price. If a seller defaults
under a repurchase agreement, the Portfolio may have difficulty exercising its
rights to the underlying securities and may incur costs and experience time
delays in connection with the disposition of such securities. To evaluate
potential risks, SCMI reviews the credit-worthiness of banks and dealers with
which the Portfolio enters into repurchase agreements.
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ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Investment Policies" in the
Prospectus sets forth the circumstances in which the Portfolio may invest in
"restricted securities". In connection with the Portfolio's original purchase
of restricted securities, it may negotiate rights with the issuer to have such
securities registered for sale at a later time. Further, the registration
expenses of illiquid restricted securities 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 the decision to sell the securities and the time the Portfolio
would be permitted 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 to sell.
LOANS OF PORTFOLIO SECURITIES
The Portfolio may lend its portfolio securities subject to the restrictions
stated in the Prospectus. Under applicable regulatory requirements (which are
subject to change), the loan collateral must: (i) on each business day, at least
equal the market value of the loaned securities; and (ii) consist of cash, bank
letters of credit, U.S. Government securities, other cash equivalents or liquid
equity securities in which the Portfolio is permitted to invest. To be
acceptable as collateral, letters of credit must obligate a bank to pay amounts
demanded by the Portfolio if the demand meets the terms of the letter. Such
terms and the issuing bank must be satisfactory to the Portfolio. When lending
portfolio securities, the Portfolio receives from the borrower an amount equal
to the interest paid or the dividends declared on the loaned securities during
the term of the loan plus the interest on the collateral securities (less any
finders' or administrative fees the Portfolio pays in arranging the loan). The
Portfolio may share the interest it receives on the collateral securities with
the borrower if it realizes at least a minimum amount of interest required by
the lending guidelines established by the Trust's Board of Trustees (the "Trust
Board"). The Portfolio will not lend its portfolio securities to any officer,
director, employee or affiliate of the Portfolio or SCMI. The terms of the
Portfolio's loans must meet certain tests under the Internal Revenue Code and
permit the Portfolio to reacquire loaned securities on five business days'
notice or in time to vote on any important matter.
Portfolio securities purchased with cash collateral are subject to possible
depreciation. Loans of securities by the Portfolio will be subject to
termination at the Portfolio's or the borrower's option. The Portfolio may pay
reasonable negotiated fees in connection with loaned securities, so long as such
fees are set forth in a written contract and approved by Schroder Core's Board
of Trustees (the "Schroder Core Board").
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To hedge against adverse price movements in the securities held in its portfolio
and the currencies in which they are denominated (as well as in the securities
it might wish to purchase and their denominated currencies), the Portfolio may
engage in transactions in forward foreign currency exchange contracts.
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell a 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. The Portfolio may enter into
forward contracts as a hedge against fluctuations in future foreign exchange
rates.
Currently, only a limited market, if any, exists for hedging transactions
relating to currencies in many emerging market countries or to securities of
issuers domiciled or principally engaged in business in emerging market
countries. This may limit the Portfolio's ability to hedge its investments
effectively in those emerging markets. Hedging against a decline in the value
of a currency does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline. Such
transactions also limit the opportunity for gain if the value of the hedged
currencies should rise. In addition, it may not be possible for the Portfolio
to hedge against a devaluation that is so generally anticipated that the
Portfolio is not able to contract to sell the currency at a price above the
devaluation level it anticipates.
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The Portfolio will enter into forward contracts under certain instances. When
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may, for example, wish to secure the price
of the security in U.S. dollars or some other foreign currency which the
Portfolio is temporarily holding in its portfolio. By entering into a forward
contract for the purchase or sale (for a fixed amount of dollars or other
currency) of the amount of foreign currency involved in the underlying security
transactions, the Portfolio will be able to protect itself against possible loss
(resulting from adverse changes in the relationship between the U.S. dollar or
other currency being used for the security purchase and the foreign currency in
which the security is denominated) during the period between the date on which
the security is purchased or sold and the date on which payment is made or
received. In addition, when the Portfolio anticipates purchasing securities at
some future date, and wishes to secure the current exchange rate of the currency
in which those securities are denominated against the U.S. dollar or some other
foreign currency, it may enter into a forward contract to purchase an amount of
currency equal to part or all of the value of the anticipated purchase, for a
fixed amount of U.S. dollars or other currency.
In all of the above instances, if the currency in which the Portfolio's
portfolio securities (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased, then the
Portfolio will have realized fewer gain than if the Portfolio had not entered
into the forward contracts. Furthermore, 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
changes 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.
To the extent that the Portfolio enters into forward contracts to hedge against
a decline in the value of portfolio holdings denominated in a particular foreign
currency resulting from currency fluctuations, there is a risk that the
Portfolio may nevertheless realize a gain or loss as a result of currency
fluctuations after such portfolio holdings are sold should the Portfolio be
unable to enter into an "offsetting" forward foreign currency contract with the
same party or another party. The Portfolio may be limited in its ability to
enter into hedging transactions involving forward contracts by the Internal
Revenue Code requirements relating to qualifications as a regulated investment
company (see "Taxation").
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 the investment adviser. Generally, the Portfolio will not enter
into a forward contract with a term of greater than one year.
OPTIONS AND FUTURES TRANSACTIONS
As discussed in the Prospectus, the Portfolio may write covered call options
against securities held in its portfolio and covered put options on eligible
portfolio securities and may purchase options of the same series to effect
closing transactions, and may hedge against potential changes in the market
value of its investments (or anticipated investments), by purchasing put and
call options on portfolio (or eligible portfolio) securities (and the currencies
in which they are denominated) and engaging in transactions involving futures
contracts and options on such contracts.
Call and put options on U.S. Treasury notes, bonds and bills and on various
foreign currencies are listed on several U.S. and foreign securities exchanges
and are written in over-the-counter transactions ("OTC Options"). Listed
options are issued or guaranteed by the exchange on which they trade or by a
clearing corporation such as the Options Clearing Corporation ("OCC").
Ownership of a listed call option gives the Portfolio the right to buy from the
OCC (in the U.S.) or other clearing corporation or exchange, the underlying
security or currency covered by the option at the stated exercise price (the
price per unit of the underlying security or currency) by filing an exercise
notice prior to the expiration date of the option. The writer (seller) of the
option would then have the obligation to sell, to the OCC (in the U.S.) or other
clearing corporation or exchange, the underlying security or currency at that
exercise price prior to the expiration date of the option, regardless of its
then current market price. Ownership of a listed put option would give the
Portfolio the right to sell the underlying security or currency to the OCC (in
the U.S.) or other clearing corporation or exchange at the stated exercise
price. Upon notice of exercise of the put option, the writer of the option
would have the obligation to purchase the underlying security or currency from
the OCC (in the U.S.) or other clearing corporation or exchange at the exercise
price.
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The OCC or other clearing corporation or exchange that issues listed options
ensures that all transactions in such options are properly executed. OTC
options are purchased from or sold (written) to dealers or financial
institutions that have entered into direct agreements with the Portfolio. With
OTC options, variables such as expiration date, exercise price and premium are
agreed between the Portfolio and the transacting dealer. If the transacting
dealer fails to make or take delivery of the securities or amount of foreign
currency underlying an option it has written, the Portfolio would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. The Portfolio will engage in OTC option transactions only with
member banks of the Federal Reserve System or primary dealers in U.S. Government
securities or with affiliates of such banks or dealers which have capital of at
least $50 million or whose obligations are guaranteed by an entity having
capital of at least $50 million.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write options on
foreign currencies for purposes similar to those involved with investing in
forward foreign currency exchange contracts. For example, in order to protect
against declines in the dollar value of portfolio securities that are
denominated in a foreign currency, the Portfolio may purchase put options on an
amount of such foreign currency equivalent to the current value of the portfolio
securities involved. As a result, the Portfolio would be able to sell the
foreign currency for a fixed amount of U.S. dollars, thereby securing the dollar
value of the portfolio securities (less the amount of the premiums paid for the
options). Conversely, the Portfolio may purchase call options on foreign
currencies in which securities it anticipates purchasing are denominated to
secure a set U.S. dollar price for such securities and protect against a decline
in the value of the U.S. dollar against such foreign currency. The Portfolio
may also purchase call and put options to close out written option positions.
The Portfolio also may write covered call options on foreign currency to protect
against potential declines in its portfolio securities that are denominated in
foreign currencies. If the U.S. dollar value of the portfolio securities falls
as a result of a decline in the exchange rate between the foreign currency in
which it is denominated and the U.S. dollar, then a loss to the Portfolio
occasioned by such value decline would be ameliorated by receipt of the premium
on the option sold. At the same time, however, the Portfolio gives up the
benefit of any rise in value of the relevant portfolio securities above the
exercise price of the option and, in fact, only receives a benefit from the
writing of the option to the extent that the value of the portfolio securities
falls below the price of the premium received. The Portfolio also may write
options to close out long call option positions. A covered put option on a
foreign currency would be written by the Portfolio for the same reason it would
purchase a call option, namely, to hedge against an increase in the U.S. dollar
value of a foreign security that the Portfolio anticipates purchasing. In this
case, the receipt of the premium would offset, to the extent of the size of the
premium, any increased cost to the Portfolio resulting from an increase in the
U.S. dollar value of the foreign security. However, the Portfolio could not
benefit from any decline in the cost of the foreign security that is greater
than the price of the premium received. The Portfolio also may write options to
close out long put option positions.
Markets in foreign currency options are relatively new, and the Portfolio's
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Portfolio will not
purchase or write such options unless and until, in the opinion of the SCMI, the
market for them has developed sufficiently to ensure that their risks are not
greater than the risks in connection with the underlying currency, there can be
no assurance that a liquid secondary market will exist for a particular option
at any specific time. In addition, options on foreign currencies are affected
by all of those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar, with the result that the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security,
including foreign securities held in a "hedged" investment portfolio. Because
foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
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There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
available is generally representative of very large transactions in the
interbank market and, thus, may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the
extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that are not reflected in the options market.
COVERED CALL WRITING. The Portfolio is permitted to write covered call options
on portfolio securities, and on the U.S. dollar and foreign currencies in which
they are denominated, without limit. Generally, a call option is "covered" if
the Portfolio owns (or has the right to acquire without additional cash
consideration (or for additional cash consideration held for the Portfolio by
its custodian in a segregated account) the underlying security (currency)
subject to the option. In the case of call options on U.S. Treasury Bills,
however, the Portfolio might own U.S. Treasury Bills of a different series from
those underlying the call option, but with a principal amount and value
corresponding to the exercise price and a maturity date no later than that of
the security (currency) deliverable under the call option. A call option is
also covered if the Portfolio holds a call on the same security as the
underlying security (currency) of the written option, where the exercise price
of the call used for coverage is equal to or less than the exercise price of the
call or greater than the exercise price of the call written if the
mark-to-market difference is maintained by the Portfolio in cash, U.S.
Government securities or other high-grade debt obligations held by the Portfolio
in a segregated account maintained with its custodian.
The Portfolio receives a premium from the purchaser in return for a call it has
written. Receipt of such premiums may enable the Portfolio to earn a higher
level of current income than it would earn from holding the underlying
securities (currencies) alone. Moreover, the premium received offsets a portion
of the potential loss incurred by the Portfolio if the securities (currencies)
underlying the option are ultimately sold (exchanged) by the Portfolio at a
loss. Furthermore, a premium received on a call written on a foreign currency
ameliorates any potential loss of value on the portfolio security due to a
decline in the value of the currency. However, during the option period, the
covered call writer has, in return for the premium, given up the opportunity for
capital appreciation above the exercise price should the market price of the
underlying security (or the exchange rate of the currency in which it is
denominated) increase but has retained the risk of loss should the price of the
underlying security (or the exchange rate of the currency in which it is
denominated) decline. The premium received fluctuates with varying economic
market conditions. If the market value of the portfolio securities (or the
currencies in which they are denominated) upon which call options have been
written increases, the Portfolio may receive a lower total return from the
portion of its portfolio upon which calls have been written than it would have
had such calls not been written.
With respect to listed options and certain OTC options, during the option period
the Portfolio may be required, at any time, to deliver the underlying security
(currency) against payment of the exercise price on any calls it has written
(exercise of certain listed and OTC options may be limited to specific
expiration dates). This obligation terminates upon the expiration of the option
period or at such earlier time when the writer effects a closing purchase
transaction. A closing purchase transaction is accomplished by purchasing an
option of the same series as the option previously written. However, once the
Portfolio has been assigned an exercise notice, the Portfolio is unable to
effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a profit on an
outstanding call option, to prevent an underlying security (currency) from being
called, to permit the sale of an underlying security (or the exchange of the
underlying currency) or to enable the Portfolio to write another call option on
the underlying security (currency) with either a different exercise price or
expiration date or both. The Portfolio may realize a net gain or loss from a
closing purchase transaction depending upon whether the amount of the premium
received on the call option is more or less than the cost of effecting the
closing purchase transaction. Any loss incurred in a closing purchase
transaction may be wholly or partially offset by unrealized appreciation in the
market value of the underlying security (currency). Conversely, a gain
resulting from a closing purchase transaction could be offset in whole or in
part or exceeded by a decline in the market value of the underlying security
(currency).
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If a call option expires unexercised, the Portfolio realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security (currency) during the option period. If a call option is exercised,
the Portfolio realizes a gain or loss from the sale of the underlying security
(currency) equal to the difference between the purchase price of the underlying
security (currency) and the proceeds of the sale of the security (currency) plus
the premium received on the option less the commission paid.
Options written by the Portfolio normally have expiration dates of up to
eighteen months from the date written. The exercised price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
COVERED PUT WRITING. As a writer of a covered put option, the Portfolio would
incur an obligation to buy the security underlying the option from the purchaser
of the put, at the option's exercise price at any time during the option period,
at the purchaser's election (certain listed and OTC put options written by the
Portfolio will be exercisable by the purchaser only on a specific date). A put
is "covered" if at all times the Portfolio maintains with its custodian (in a
segregated account) cash, U.S. Government securities or other high-grade
obligations in an amount equal to at least the exercise price of the option.
Similarly, a short put position could be covered by the Portfolio by its
purchase of a put option on the same security (currency) as the underlying
security of the written option, where the exercise price of the purchased option
is equal to or more than the exercise price of the put written or less than the
exercise price of the put written if the marked to market difference is
maintained by the Portfolio in cash, U.S. Government securities or other
high-grade debt obligations which the Portfolio holds in a segregated account
maintained at its custodian. In writing puts, the Portfolio assumes the risk of
loss should the market value of the underlying security (currency) decline below
the exercise price of the option (any loss being decreased by the receipt of the
premium on the option written). In the case of listed options, during the
option period the Portfolio may be required, at any time, to make payment of the
exercise price against delivery of the underlying security (currency). The
operation of and limitations on covered put options in other respects are
substantially identical to those of call options.
The Portfolio will write put options for three purposes: (i) to receive the
income derived from the premiums paid by purchasers; (ii) when the investment
adviser wishes to purchase the security (or a security denominated in the
currency underlying the option) underlying the option at a price lower than its
current market price (in which case it will write the covered put at an exercise
price reflecting the lower purchase price sought); and (iii) to close out a long
put option position. The potential gain on a covered put option is limited to
the premium received on the option (less the commissions paid on the
transaction) while the potential loss equals the differences between the
exercise price of the option and the current market price of the underlying
securities (currencies) when the put is exercised, offset by the premium
received (less the commissions paid on the transaction).
PURCHASING CALL AND PUT OPTIONS. The Portfolio may purchase listed and OTC call
and put options in amounts equaling up to 5% of its total assets. The Portfolio
may purchase a call option in order to close out a covered call position (see
"Covered Call Writing"), to protect against an increase in price of a security
it anticipates purchasing or, in the case of a call option on foreign currency,
to hedge against an adverse exchange rate move of the currency in which the
security it anticipates purchasing is denominated vis-a-vis the currency in
which the exercise price is denominated. The purchase of the call option to
effect a closing transaction on a call written over-the-counter may be a listed
or an OTC option. In either case, the call purchased is likely to be on the
same securities (currencies) and have the same terms as the written option. If
purchased over-the-counter, the option would generally be acquired from the
dealer or financial institution which purchased the call written by the
Portfolio.
The Portfolio may purchase put options on securities (currencies) that it holds
in its portfolio to protect itself against a decline in the value of the
security and to close out written put option positions. If the value of the
underlying security (currency) were to fall below the exercise price of the put
purchased in an amount greater then the premium paid for the option, the
Portfolio would incur no additional loss. In addition, the Portfolio may sell a
put option it has previously purchased prior to the sale of the securities
(currencies) underlying such option. Such a sale would 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 option that is sold.
Any such gain or loss could be offset in whole or in
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part by a change in the market value of the underlying security (currency). If
a put option purchased by the Portfolio expired without being sold or exercised,
the premium would be lost.
RISKS OF OPTIONS TRANSACTIONS. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity
for capital appreciation above the exercise price if the market price of the
underlying security (or the value of its denominated currency) increases but has
retained the risk of loss if the price of the underlying security (or the value
of its denominated currency) declines. The writer has no control over the time
when it may be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or receive the underlying securities at the exercise
price.
Prior to exercise or expiration, an option position can only be terminated by
entering into a closing purchase or sale transaction. If a covered call option
writer is unable to effect a closing purchase transaction or to purchase an
offsetting OTC option, it cannot sell the underlying security until the option
expires or the option is exercised. Accordingly, a covered call option writer
may not be able to sell an underlying security at a time when it might otherwise
be advantageous to do so. A covered put option writer who is unable to effect a
closing purchase transaction or to purchase an offsetting OTC option would
continue to bear the risk of decline in the market price of the underlying
security until the option expires or is exercised. In addition, a covered put
writer would be unable to utilize the amount held in cash or U.S. Government or
other high grade short-term obligations as security for the put option for other
investment purposes until the exercise or expiration of the option.
The Portfolio's ability to close out its position as a writer of an option is
dependent upon the existence of a liquid secondary market on option exchanges.
There is no assurance that such a market will exist, particularly in the case of
OTC options, since such options will generally only be closed out by entering
into a closing purchase transaction with the purchasing dealer. However, the
Portfolio may be able to purchase an offsetting option that does not close out
its position as a writer but constitutes an asset of equal value to the
obligation under the option written. If the Portfolio is not able to either
enter into a closing purchase transaction or purchase an offsetting position, it
will be required to maintain the securities subject to the call, or the
collateral underlying the put, even though it might not be advantageous to do
so, until a closing transaction can be entered into (or the option is exercised
or expires).
Among the possible reasons for the absence of a liquid secondary market on an
exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (iv) interruption of the normal
operations on an exchange; (v) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in options, the Portfolio could experience delays and/or losses
in liquidating open positions purchased or sold through the broker and/or incur
a loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions will be entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by SCMI.
Exchanges have established limitations governing the maximum number of options
on the same underlying security or futures contract (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.
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The hours of trading for options may not conform to the hours during which the
underlying securities are traded. If the option markets close before the markets
for the underlying securities, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
The extent to which the Portfolio may enter into transactions involving options
may be limited by the Internal Revenue Code's requirements for qualification as
a regulated investment company and the Portfolio's intention to qualify as such
(see "Taxation").
FUTURES CONTRACTS. The Portfolio may purchase and sell interest rate, currency,
and index futures contracts ("futures contracts") that are traded on U.S. and
foreign commodity exchanges, on such underlying securities as U.S. Treasury
bonds, notes and bills, and/or any foreign government fixed-income security
("interest rate futures contracts"), on various currencies ("currency futures
contracts") and on such indices of U.S. and foreign securities as may exist or
come into being ("index futures contracts").
The Portfolio may purchase or sell interest rate futures contracts for the
purpose of hedging some or all of the value of its portfolio securities (or
anticipated portfolio securities) against changes in prevailing interest rates.
If the investment adviser anticipates that interest rates may rise and,
concomitantly, that the price of certain of its portfolio securities fall, the
Portfolio may sell an interest rate futures contract. If declining interest
rates are anticipated, the Portfolio may purchase an interest rate futures
contract to protect against a potential increase in the price of securities the
Portfolio intends to purchase. Subsequently, appropriate securities may be
purchased by the Portfolio in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts.
The Portfolio may purchase or sell currency futures contracts on currencies in
which its portfolio securities (or anticipated portfolio securities) are
denominated for the purposes of hedging against anticipated changes in currency
exchange rates. The Portfolio may enter into currency futures contracts for the
same reasons as set forth above for entering into forward foreign currency
exchange contracts; namely, to secure the value of a security purchased or sold
in a given currency vis-a-vis a different currency or to hedge against an
adverse currency exchange rate movement of a portfolio security's (or
anticipated portfolio security's) denominated currency vis--vis a different
currency.
The Portfolio may purchase or sell index futures contracts for the purpose of
hedging some or all of its portfolio (or anticipated portfolio) securities
against changes in their prices. If it anticipates that the prices of
securities it holds may fall, the Portfolio may sell an index futures contract.
Conversely, if the Portfolio wishes to hedge against anticipated price rises in
those securities which it intends to purchase, the Portfolio may purchase an
index futures contract.
In addition to the above, interest rate, currency and index futures contracts
will be bought or sold in order to close out short or long positions maintained
by the Portfolio in corresponding futures contracts.
Although most interest rate futures contracts call for actual delivery or
acceptance of securities, the contracts usually are closed out before the
settlement date without making or taking delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security (currency) and the same delivery date.
If the sale price exceeds the offsetting purchase price, the seller would be
paid the difference and would realize a gain. If the offsetting purchase price
exceeds the sale price, the seller would pay the difference and would realize a
loss. Similarly, a futures contract purchase is closed out by effecting a
futures contract sale for the same aggregate amount of the specific type of
security (currency) and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Portfolio will be able to enter into a
closing transaction.
INTEREST RATE FUTURES CONTRACTS. When the Portfolio enters into an interest
rate futures contract, it is initially required to deposit with the Portfolio's
custodian (in a segregated account in the name of the broker performing the
transaction) an "initial margin" of cash or U.S. Government securities or other
high grade short-term obligations
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equal to approximately 2% of the contract amount. Initial margin requirements
are established by the exchanges on which futures contracts trade and may
change. In addition, brokers may establish margin deposit requirements in
excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of money by a
brokers' client but is, rather, a good faith deposit on the futures contract
that will be returned to the Portfolio upon the proper termination of the
futures contract. The margin deposits made are marked to market daily, and the
Portfolio may be required to make subsequent deposits with the Portfolio's
futures contract clearing broker of cash or U.S. Government securities (called
"variation margin") that are reflective of price fluctuations in the futures
contract.
CURRENCY FUTURES CONTRACTS. Generally, foreign currency futures contracts
provide for the delivery of a specified amount of a given currency, on the
exercise date, for a set exercise price denominated in U.S. dollars or other
currency. Foreign currency futures contracts would be entered into for the same
reason and under the same circumstances as forward foreign currency exchange
contracts. SCMI assesses such factors as cost spreads, liquidity and transaction
costs in determining whether to use futures contracts or forward contracts in
its foreign currency transactions and hedging strategy.
Purchasers and sellers of foreign currency futures contracts are subject to the
same risks that apply generally to the buying and selling of futures contracts.
In addition, there are risks associated with foreign currency futures contracts
and their use as a hedging device similar to those associated with options on
foreign currencies described above. Further, settlement of a foreign currency
futures contract must occur within the country issuing the underlying currency.
Thus, the Portfolio must accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign restrictions or regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
may be required to pay any fees, taxes or charges associated with such delivery
that are assessed in the issuing country.
INDEX FUTURES CONTRACTS. The Portfolio may invest in index futures contracts.
An index futures contract sale creates an obligation by the Portfolio, as
seller, to deliver cash at a specified future time. An index futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of cash at a specified future time. Futures contracts on indices do
not require the physical delivery of securities but provide for a final cash
settlement on the expiration date that reflects accumulated profits and losses
credited or debited to each party's account.
The Portfolio is required to maintain margin deposits with brokerage firms
through which it effects index futures contracts in a manner similar to that
described above for interest rate futures contracts. In addition, due to
current industry practice, daily variations in gain and loss on open contracts
are required to be reflected in cash in the form of variation margin payments.
The Portfolio may be required to make additional margin payments during the term
of the contract.
At any time prior to expiration of the futures contract, the Portfolio may elect
to close the position by taking an opposite position, which will operate to
terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash may be required
to be paid by or released to the Portfolio and the Portfolio realizes a loss or
gain.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write call and put
options on futures contracts traded on an exchange and may enter into closing
transactions with respect to such options to terminate an existing position. An
option on a futures contract gives the purchaser the right (in return for the
premium paid) to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the delivery of the position in the futures contract by the writer of
the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract at the time of exercise
exceeds, in case of a call, or is less than, in the case of a put, the exercise
price of the option on the futures contract.
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The Portfolio may purchase and write options on futures contracts for purposes
identical to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the investment
adviser wished to protect against an increase in interest rates and the
resulting negative impact on the value of a portion of its fixed-income
portfolio, it might write a call option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge. Any premiums received in the writing of
options on futures contracts may provide a further hedge against losses
resulting from price declines in portions of the Portfolio's investment
portfolio.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the
Portfolio will not purchase or write options on foreign currency futures
contracts unless and until, in SCMI's opinion, the market for such options has
developed sufficiently that the risks in connection with them are not greater
than the risks in connection with transactions in the underlying foreign
currency futures contracts.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The
Portfolio may not enter into futures contracts or purchase related options
thereon if, immediately thereafter, the amount committed to margin plus the
amount paid for premiums for unexpired options on futures contracts exceeds 5%
of the value of the Portfolio's total assets, after taking into account
unrealized gain and unrealized loss on such contracts it has entered into,
provided, however, that in the case of an option that is in-the-money (the
exercise price of the call (put) option is less (more) than the market price of
the underlying security) at the time of purchase, the in-the-money amount may be
excluded in calculating the 5%. However, there is no overall limitation on the
percentage of the Portfolio's assets that may be subject to a hedge position.
In addition, in accordance with the regulations of the Commodity Futures Trading
Commission ("CFTC") under which the Portfolio is exempted from registration as a
commodity pool operator, the Portfolio may only enter into futures contracts and
options on futures contracts transactions for purposes of hedging a part or all
of its portfolio. Except as described above, there are no other limitations on
the use of futures and options thereon by the Portfolio.
The writer of an option on a futures contract is required to deposit initial and
variation margin pursuant to requirements similar to those applicable to futures
contracts. Premiums received from the writing of an option on a futures
contract are included in initial margin deposits.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio
may sell a futures contract to protect against the decline in the value of
securities (or the currency in which they are denominated) held by the
Portfolio. However, it is possible that the futures market may advance and the
value of the Portfolio's securities (or the currency in which they are
denominated) may decline. If this occurs, the Portfolio will lose money on the
futures contract and also experience a decline in value of its portfolio
securities. While this might occur for only a very brief period or to a very
small degree, over time the value of a diversified portfolio will tend to move
in the same direction as the futures contracts.
If the Portfolio purchases a futures contract to hedge against the increase in
value of securities it intends to buy (or the currency in which they are
denominated) and the value of such securities (currencies) decreases, then the
Portfolio may determine not to invest in the securities as planned and will
realize a loss on the futures contract that is not offset by a reduction in the
price of the securities.
If the Portfolio has sold a call option on a futures contract, it will cover
this position by holding (in a segregated account maintained at its custodian)
cash, U.S. Government securities or other high-grade debt obligations equal in
value (when added to any initial or variation margin on deposit) to the market
value of the securities (currencies) underlying the futures contract or the
exercise price of the option. Such a position may also be covered by owning the
securities (currencies) underlying the futures contract or by holding a call
option permitting the Portfolio to purchase the same contract at a price no
higher than the price at which the short position was established.
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In addition, if the Portfolio holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other high-grade debt obligations
equal to the purchase price of the contract (less the amount of initial or
variation margin on deposit) in a segregated account maintained for the
Portfolio by its custodian. Alternatively, the Portfolio could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Portfolio.
Exchanges limit the amount by which the price of a futures contract may move on
any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin on open
futures contract positions. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do so.
In addition, the Portfolio may be required to take or make delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close out options and futures
contract positions could also have an adverse impact on the Portfolio's ability
to effectively hedge its portfolio.
Futures contracts and options thereon that are purchased or sold on foreign
commodities exchanges may have greater price volatility than their U.S.
counterparts. Furthermore, foreign commodities exchanges may be less regulated
and under less governmental scrutiny than U.S. exchanges, and brokerage
commissions, clearing costs and other transaction costs may be higher. Greater
margin requirements may limit the Portfolio's ability to enter into certain
commodity transactions on foreign exchanges. Moreover, differences in clearance
and delivery requirements on foreign exchanges may cause delays in the
settlement of the Portfolio's foreign exchange transactions.
In the event of the bankruptcy of a broker through which the Portfolio engages
in transactions in futures or options thereon, the Portfolio could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Similarly, in the event of the bankruptcy of the writer of an OTC
option purchased by the Portfolio, the Portfolio could experience a loss of all
or part of the value of the option. Transactions are entered into by the
Portfolio only with brokers or financial institutions deemed creditworthy by
SCMI.
While the futures contracts and options transactions in which the Portfolio
engages for the purpose of hedging its portfolio securities are not speculative
in nature, there are risks inherent in the use of such instruments. One such
risk that may arise in employing futures contracts to protect against the price
volatility of portfolio securities (and the currencies in which they are
denominated) is that the prices of securities and indices subject to futures
contracts (and thereby the futures contract prices) may correlate imperfectly
with the behavior of the cash prices of the Portfolio's portfolio securities
(and the currencies in which they are denominated). Another such risk is that
prices of interest rate futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Portfolio seeks a hedge.
A correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and are expected to diminish as the contract
approaches maturity.
There may exist an imperfect correlation between the price movements of futures
contracts purchased by the Portfolio and the movements in the prices of the
securities (currencies) which are the subject of the hedge. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationship between the debt securities or currency markets and futures
markets could result. Price distortions could also result if investors in
futures contracts choose to make or take delivery of underlying securities
rather than engage in closing transactions due to the resultant reduction in the
liquidity of the futures market. In addition, because the deposit requirements
in the futures markets are less onerous than margin requirements in the cash
market, increased participation by speculators in the futures market can be
anticipated with the resulting speculation causing temporary price distortions.
Due to the possibility of price distortions in the futures contracts market and
because of the imperfect correlation between movements in the prices
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of securities and movements in the prices of futures contracts, a correct
forecast of interest rate trends may still not result in a successful hedging
transaction.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Portfolio may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin. In
addition, limitations imposed by an exchange or board of trade on which futures
contracts are traded may compel the Portfolio to or prevent it from closing out
a contract, which may result in reduced gain or increased loss to the Portfolio.
The absence of a liquid market in futures contracts might cause the Portfolio to
make or take delivery of the underlying securities (currencies) at a time when
it may be disadvantageous to do so.
The extent to which the Portfolio may enter into transactions involving futures
contracts and options thereon may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company and the
Portfolio's intention to qualify as such (see "Taxation").
WARRANTS AND STOCK RIGHTS
The Portfolio may invest in warrants, which are options to purchase an equity
security at a specified price (usually representing a premium over the
applicable market value of the underlying equity security at the time of the
warrant's issuance). Investments in warrants involve certain risks, including
the possible lack of a liquid market for the resale of the warrants, potential
price fluctuations as a result of speculation or other factors and failure of
the price of the underlying security to reach a level at which the warrant can
be prudently exercised (in which case the warrant may expire without being
exercised, resulting in the loss of the Portfolio's entire investment therein).
The prices of warrants do not necessarily move parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
In addition, the Portfolio may invest up to 5% of its assets (at the time of
investment) in stock rights. A stock right is an option given to a shareholder
to buy additional shares at a predetermined price during a specified time
period.
INVESTMENT RESTRICTIONS
The following investment restrictions, except where stated to be non-fundamental
policies, are also fundamental policies of the Portfolio and, together with the
fundamental policies and investment objective described in the Prospectus,
cannot be changed without the vote of a "majority" of the Portfolio's
outstanding shares. Under the Investment Company Act of 1940 (the "1940 Act"),
such a "majority" vote is defined as the vote of the holders of the lesser of:
(i) 67% of more of the shares present or represented by proxy at a meeting of
shareholders, if the holders of more than 50% of the outstanding shares are
present; or (ii) more than 50% of the outstanding shares. Under these
additional restrictions, the Portfolio cannot:
1. Underwrite securities of other companies (except insofar as the
Portfolio might be deemed to be an underwriter in the resale of any
securities held in its portfolio);
2. Invest in commodities or commodity contracts (other than Hedging
Instruments, which it may use as permitted by any of its other
fundamental policies, whether or not any such Hedging Instrument is
considered to be a commodity or a commodity contract);
3. Purchase securities on margin; however, the Portfolio may make margin
deposits in connection with any Hedging Instruments which it may use
as permitted by any of its other fundamental policies;
4. Purchase or write puts or calls except as permitted by any of its
other fundamental policies;
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5. Lend money except in connection with the acquisition of debt
securities that the Portfolio's investment policies and restrictions
permit it to purchase (see "Investment Objective" and "Investment
Policies" in the Prospectus). The Portfolio may make loans of
portfolio securities (see "Loans of Portfolio Securities") and enter
into repurchase agreements (see "Repurchase Agreements");
6. Make short sales of securities;
7. Invest in interests in oil, gas or other mineral exploration or
development programs (but may purchase readily marketable securities
of companies which operate, invest in, or sponsor such programs);
8. Invest in real estate or in interests in real estate (but may purchase
readily marketable securities of companies holding real estate or
interests therein).
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. Each of these individuals currently serves
in the same capacity for Schroder Core.
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
RALPH E. HANSMANN (Honorary), 40 Wall Street, New York, New York - Honorary
Trustee of the Trust - Private investor; Director, First Eagle Fund of America,
Inc.; Director, Verde Exploration, Ltd.; Trustee Emeritus, Institute for
Advanced Study; Trustee and Treasurer, New York Public Library; Life Trustee,
Hamilton College.
JOHN I. HOWELL, Greenwich, Connecticut - 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, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust - retired since March, 1988; prior thereto, consultant
to SCMI since February 1, 1984.
MARK J. SMITH (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a 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 Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
16
<PAGE>
MARGARET H. DOUGLAS-HAMILTON (b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a 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.
CATHERINE S. WOOLEDGE, 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.
BARBARA GOTTLIEB (c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ (b) (c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
JOHN Y. KEFFER, Two Portland Square, Portland, Maine - Vice President of the
Trust. President of FFC, the Fund's transfer and dividend disbursing agent and
fund accountant and other affiliated entities including Forum Financial
Services, Inc. and Forum Advisors, Inc.
JANE P. LUCAS (c), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 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.
THOMAS G. SHEEHAN, 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, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO (b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 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; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
17
<PAGE>
ALEXANDRA POE, 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; 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.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) 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.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive
an annual fee of $1,000 and a fee of $250 for each meeting of the Trust 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 Fund 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>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrued Retirement From Trust And
As Part of Trust Fund Complex
Expenses Paid To Trustees
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $1,750
Mr. Hansmann 1,375 0 0 1,375
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 February 15, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Fund's outstanding shares.
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
U.S. civil judgments against them. Civil remedies and criminal penalties under
U.S. federal securities law may be unenforceable in the United Kingdom
Extradition treaties now in effect between the U.S. and the United Kingdom might
not subject such persons to effective enforcement of the criminal penalties of
such acts.
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
and SCMI. SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the
wholly owned U.S. holding company 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 in eighteen countries. The
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<PAGE>
Schroder Group specializes in providing investment management services, with
funds under management currently in excess of $150 billion as of December 31,
1996.
Under the Investment Advisory Agreement, SCMI is responsible for managing the
investment and reinvestment of the Portfolio's assets and continuously reviews,
supervises and administers its 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 selected. SCMI also furnishes to Schroder Core 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 the 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
inside information that may be in its possession or in the possession of its
affiliates.
The Investment Advisory Agreement continues in effect provided such continuance
is approved annually: (i) by the holders of a majority of the outstanding
voting securities of the Portfolio or by Schroder Core 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 Fund on 60 days' written notice to the investment
adviser, or by the investment adviser on 60 days' written notice to the Trust,
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 duties to the Portfolio, except for
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of any obligations and duties under the
Agreement.
Under the terms of the Investment Advisory Agreement, SCMI is entitled to
receive a monthly fee on an annual basis equal to 1.00% of its average daily net
assets. For the period from commencement of operations through October 31, 1995
and the fiscal year ended October 31, 1996, SCMI received advisory fees of
$19,326 and $1,115,324 (after waivers of $51,560), respectively.
The Fund currently invests all of its assets in the Portfolio. As long as the
Fund remains completely invested in the Portfolio (or any other investment
company), SCMI is not entitled to receive an investment advisory fee with
respect to the Fund. The Fund may withdraw its investment from the Portfolio at
any time if the Trust Board determines that it is in the best interests of the
Fund and its shareholders to do so. Accordingly, the Trust retains SCMI as
investment adviser to manage the Fund's assets in the event the Fund so
withdraws its investment. The investment advisory agreement between the Trust
and SCMI with respect to the Fund is the same in all material respects as the
Portfolio's Investment Advisory Agreement (except as to the parties, the
circumstances under which fees will be paid, the jurisdiction whose laws govern
the agreement and fees payable thereunder). During a time that the Fund did not
have substantially all of its assets invested in the Portfolio or another
investment company, for providing investment advisory services under the
investment advisory agreement for the Fund, SCMI would be entitled to receive an
advisory fee of 1.00% of the Fund's average daily net assets.
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
which 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 Securities and Exchange Commission and state
securities commissions; and (iii) general supervision of the operation of the
Fund, including coordination 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.
19
<PAGE>
During any period in which the Fund invests substantially all of its assets in
the Portfolio, for providing administrative services Schroder Advisors is
entitled to receive from the Fund a fee, payable monthly, at the annual rate of
0.05% of the Fund's average daily net assets. During any period in which the
Fund invests substantially all of its assets directly in securities, for
providing administrative services SCMI would be entitled to receive from the
Fund a monthly fee at the annual rate of 0.15% 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. Pursuant
to its Agreement, Forum assists Schroder Advisors with certain of its
responsibilities under the Administration Agreement, including shareholder
reporting and regulatory compliance. During any period in which the Fund
invests substantially all of its assets in the Portfolio, for providing
administrative services Forum is entitled to a fee at the annual rate of 0.05%
of the average daily net assets. During any period in which the Fund invests
substantially all of its assets directly in securities, for providing
administrative services Forum would be entitled to receive a monthly fee from
the Fund at the annual rate of 0.10% 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 Fund.
Schroder Advisors and Forum provide similar services to the Portfolio pursuant
to administration and subadministration agreements between Schroder Core and
each of these entities, for which Schroder Advisors and Forum are separately
compensated at annual rates of 0.05% and 0.10%, respectively, of the Portfolio's
average daily net assets. The 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 agreements.
The fees paid by the Fund and Portfolio to SCMI and Schroder Advisors may equal
up to 1.15% of the Fund's average daily net assets. Such fees as a whole are
higher than advisory and management fees charged to mutual funds which invest
primarily in U.S. securities but not necessarily higher than those charged to
funds with investment objectives similar to that of the Fund.
From commencement of operations through October 31, 1995 and the fiscal year
ended October 31, 1996, Schroder Advisors received administrative fees from the
Fund and the Portfolio, as applicable, of $19,591 and $225,559 (after waivers of
$66,344), respectively. The Trust formerly had entered into an Administrative
Services Contract with Schroder Advisors that had substantially similar terms
and provisions in all material respects except as to the fees payable and the
circumstances under which the fees were paid. Specifically, Schroder Advisors
was entitled to a fee, payable monthly, at the annual rate of 0.25% of the
Fund's average daily net assets. During the periods, the Fund had invested
substantially all of its assets in the Portfolio, and, accordingly, Schroder
Advisors was entitled to a fee of only 0.10% and obligated to pay a fee to Forum
Financial Services, Inc. ("FFSI") at the rate of 0.05% for sub-advisory services
provided under the Sub-Administration Agreement described below.
The Trust and Schroder Advisors also had entered into a Sub-Administration
Agreement with FFSI, that had substantially similar terms and provisions in all
material respects to the current Subadministration Agreement except as to the
fees payable and the circumstances under which the fees were paid.
Specifically, payment for FFSI's services was made by Schroder Advisors and was
not a separate expense of the Fund.
DISTRIBUTION OF FUND SHARES
Schroder Advisors, 787 Seventh Avenue, New York, New York 10019, serves as
Distributor of the Fund shares under 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.
20
<PAGE>
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 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. The maximum annual amount
currently payable under the Plan is 0.25%, but 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. 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 , 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. During the periods ended
October 31, 1995 and 1996, the Fund neither accrued nor paid any dollars under
the Plan.
SERVICE ORGANIZATIONS
The Fund may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services for 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 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
21
<PAGE>
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 will be a Service Organization
or receive fees for servicing. The Fund has no intention of making any such
payments to Service Organizations with respect to accounts of institutional
investors and, in any event, will make no such payments until the Trust Board
specifically so authorizes.
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.
PORTFOLIO ACCOUNTING
FFC, 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 FFC or by FFC upon 60 days' written
notice to the Trust.
Under its agreement, FFC prepares and maintains the books and records of the
Fund 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 Securities
and Exchange Commission. For its services to the Fund, FFC 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. FFC is entitled to an additional $24,000 per year
with respect to global and international funds. In addition, FFC is also is
entitled to 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.
FFC 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. FFC 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 FFC and its employees, agents, officers and directors against
and from any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and all other expenses arising out
of or in any way related to FFC's actions taken or failures to act with respect
to a Fund or based, if applicable, upon information, instructions or requests
with respect to a Fund given or made to FFC by an officer of the Trust duly
authorized. This indemnification does not apply to FFC's actions taken or
failures to act in cases of FFC's own bad faith, willful misconduct or gross
negligence. For the fiscal periods ended October 31, 1995 and 1996, the Fund
and the Portfolio paid fund accounting fees of $35,667 and $73,000,
respectively.
22
<PAGE>
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 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 are charged to the Fund;
other expenses are allocated proportionately among all the series of the Trust
in relation to the net assets of each series.
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS
Investment decisions for the Portfolio and for the other investment advisory
clients of SCMI are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved, and a particular security
may be bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as is possible, averaged
as to price and allocated between such clients in a manner 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. The Portfolio's portfolio transaction costs are borne prorata by
its investors, including the Fund.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment of negotiated brokerage commissions. Such commissions vary among
brokers. Also, a particular broker may charge different commissions according
to the difficulty and size of the transaction; for example, transactions in
foreign securities generally involve the payment of fixed brokerage commissions,
which are generally higher than those in the U.S. Since most brokerage
transactions for the Portfolio are placed with foreign broker-dealers, certain
portfolio transaction costs for the Portfolio may be higher than fees for
similar transactions executed on U.S. securities exchanges. However, the
Portfolio's investment adviser seeks to achieve the best net results in
effecting its portfolio transactions. There is generally less governmental
supervision and regulation of foreign stock exchanges and brokers than in the
U.S. There is generally no stated commission in the case of securities traded in
the over-the-counter markets, but the price paid usually includes an undisclosed
dealer commission or mark-up. In underwritten offerings, the price paid
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer.
The Investment Advisory Agreement authorizes and directs SCMI to place orders
for the purchase and sale of the Portfolio's 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 through a substantial number of brokers and dealers.
In so doing, SCMI uses its best efforts to obtain for the Portfolio the most
favorable price and execution available. The Portfolio may, however, pay higher
than the lowest available commission rates when SCMI believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction. In seeking the most favorable price
and execution, SCMI considers all factors it may deem relevant (including price,
transaction size, the nature of the market for the security, the commission
amount, the timing of the transaction (taking into account market prices and
trends), the reputation, experience and financial stability of the
broker-dealers involved, and the quality of service rendered by the broker-
23
<PAGE>
dealers in other transactions). For the period from commencement of operations
through October 31, 1995, and the fiscal year ended October 31, 1996, the Fund
paid a total of $101,087 and $1,163,479, respectively in brokerage commissions.
It has for many years been a common practice in the investment advisory business
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
Portfolio), although not all of these services are necessarily useful and of
value in managing the Portfolio. The investment advisory fee paid by the
Portfolio is not reduced because SCMI and its affiliates receive such services.
As permitted by Section 28(e) of the 1934 Act, SCMI may cause the Portfolio to
pay a broker-dealer that provides SCMI with "brokerage and research services"
(as defined in the 1934 Act) an amount of disclosed commission for effecting a
securities transaction for the Portfolio in excess of the commission which
another broker-dealer would have charged for effecting that transaction. In
addition, SCMI may allocate brokerage transactions to broker-dealers who have
entered into arrangements under which the broker-dealer allocates a portion of
the commissions paid by the Portfolio toward payment of Portfolio expenses, such
as custodian fees.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such other policies as the Trustees may determine, SCMI may
consider sales of shares of the Portfolio as a factor in the selection of
broker-dealers to execute portfolio transactions for the Portfolio.
Subject to the general policies of the Portfolio regarding allocation of
portfolio brokerage as set forth above, the Schroder Core 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.
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 a securities
exchange paid by a registered investment company to a broker that is an
affiliated person of such investment company (or an affiliated person of another
person so affiliated) not exceed the usual and customary broker's commissions
for such transactions. It is the Portfolio's policy that commissions paid to
Schroder Wertheim or Schroder Securities will in SCMI's opinion be: (i) at least
as favorable as commissions contemporaneously charged by Schroder Wertheim or
Schroder Securities, as the case may be, on comparable transactions for their
most favored unaffiliated customers; and (ii) at least as favorable as those
which would be charged on comparable transactions by other qualified brokers
having comparable execution capability. The Schroder Core Board, including a
majority of the non-interested Trustees, has adopted procedures pursuant to Rule
17e-1 promulgated by the Securities and Exchange Commission under Section 17(e)
to ensure that commissions paid to Schroder Wertheim or Schroder Securities by
the Portfolio satisfy the foregoing standards. Such procedures will be reviewed
at least annually by the Schroder Core Board, including a majority of the
non-interested Trustees. The Schroder Core Board will also review all
transactions at least quarterly for compliance with such 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 11a2-2(T) promulgated 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.
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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 11a2-2(T), Schroder Core 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, 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 or Schroder Securities and will not direct
brokerage to Schroder Wertheim or Schroder Securities in recognition of research
services.
From time to time, the Portfolio may purchase securities of a broker or dealer
through which its regularly engages in securities transactions. During the
fiscal year ended October 31, 1996, the purchased securities of Global
Securities, one of its regular broker-dealers. Such securities had a value of
$110,979 as of the end of the Fund's fiscal year.
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. 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 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 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.
When an option is written, an amount equal to the premium received by the
Portfolio is recorded in the books as an asset, and an equivalent deferred
credit is recorded as a liability. The deferred credit is adjusted
("marked-to-market") to reflect the current market value of the option. Options
are valued at their mid-market prices in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the average of the
last bid price as obtained from two or more dealers unless there is only one
dealer, in which case that dealer's price is used. Futures contracts and
related options are stated at market value.
REDEMPTIONS IN-KIND
In the event that payment for redeemed shares is made wholly or partly in
portfolio securities, shareholders 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 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
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Portfolio. It is the Portfolio's policy, however, to redeem Interests solely in
cash up to the greater of $5,000,000 or 5% of net assets during any 90-day
period. This policy may involve the sale of certain portfolio securities before
the time SCMI might otherwise deem appropriate and, therefore, may negatively
impact the Portfolio's investment portfolio.
TAXATION
Under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund and
each other series established from time to time by the Trust Board is treated as
a separate taxpayer for federal income tax purposes with the result that: (i)
each such series must meet separately the income and distribution requirements
for qualification as a regulated investment company; and (ii) the amounts of
investment income and capital gain earned are determined on a series-by-series
(rather than on a Trust-wide) basis.
The Fund qualified for its last fiscal year as a regulated investment company
under Subchapter M of the Code and intends to so qualify each year so long as
such qualification is in the best interests of its shareholders. To do so, the
Fund intends to distribute to shareholders at least 90% of its "investment
company taxable income" as defined in the Code (which includes, among other
items, dividends, interest and the excess of any net short-term capital gain
over net long-term capital loss), and to meet certain diversification of assets,
source of income, and other requirements of the Code. By so doing, the Fund
will not be subject to federal income tax on its investment company taxable
income and "net capital gain" (the excess of net long-term capital gain over net
short-term capital loss) 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 this, 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 gain
or loss) for the calendar year; (ii) at least 98% of the excess of its capital
gain over capital loss realized during the one-year period ending October 31 of
such year; and (iii) all such ordinary income and capital gain 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 the calendar year in which the distributions are received.
Distributions of investment company taxable income (including net realized
short-term capital gain) are taxable to shareholders as ordinary income.
Generally, it is not expected that such distributions will be eligible for the
dividends received deduction available to corporations. However, if the Fund
acquires at least 10% of the stock of a foreign corporation that has U.S. source
income, a portion of the Fund's ordinary income dividends attributable to such
income may be eligible for such deduction, if certain requirements are met.
Distributions of net long-term capital gain are taxable to shareholders as
long-term capital gain, regardless of the length of time 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 distributions have been paid will, to the extent of such
capital-gain distributions, 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 distribution 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 to shareholders are taxable whether reinvested in additional
shares or received in cash. Shareholders that reinvest distributions will have
for federal income tax purposes a cost basis 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.
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Distributions by the Fund reduce the net asset value of the Fund's shares. If a
distribution reduces 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
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, which will be returned to the investor in the form of
a taxable distribution.
Upon redemption or sale of shares, a shareholder will realize a taxable gain or
loss, which 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.
Ordinary income dividends paid by the Fund to shareholders who are nonresident
aliens is subject to a 30% U.S. withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax advisors concerning
the applicability of the U.S. withholding tax.
Dividends and interest received (and, in certain circumstances, realized capital
gain) by the Fund may give rise to withholding and other taxes imposed by
foreign countries. Tax conventions between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% in value of the Fund's total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible, and intends, to file an election with
the Internal Revenue Service ("IRS") pursuant to which shareholders of the Fund
will be required to include their proportionate share of such withholding taxes
in their U.S. income tax returns as gross income; treat such proportionate share
as taxes paid by them; and, subject to certain limitations, deduct such
proportionate share in computing their taxable incomes or, alternatively, use
them as foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by noncorporate shareholders who do not
itemize deductions. A shareholder that is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the Fund's election described in this paragraph but may not be
able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder. The Fund will report annually
to its shareholders the amount per share of such withholding taxes.
Due to investment laws in certain emerging market countries, it is anticipated
that the Fund's investments in equity securities in such countries will consist
primarily of shares of investment companies (or similar investment entities)
organized under foreign law or of ownership interests in special accounts,
trusts or partnerships. If the Fund purchases shares of an investment company
(or similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. federal income tax purposes. The Fund may be subject to U.S. federal
income tax, and an additional tax in the nature of interest, on a portion of
distributions from such company and on gain from the disposition of such shares
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its shareholders.
The Fund may be eligible to make an election with respect to certain PFICs in
which it owns shares that will allow it to avoid the taxes on excess
distributions. However, such election may cause the Fund to recognize income in
a particular year in excess of the distributions received from such PFICs.
The Fund may write, purchase or sell options or futures contracts. Unless the
Fund is eligible to, and does, make a special election, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
federal income tax purposes at the end of each taxable year (I.E., each option
or futures contract will be treated as sold for its fair market value on the
last day of the taxable year). In general, unless such special election is
made, gain or loss from transactions in options and futures contracts will be
60% long-term and 40% short-term capital gain or loss.
Code Section 1092, which applies to certain "straddles," may affect the taxation
of the Fund's transactions in options and futures contracts. Under Section
1092, the Fund may be required to postpone recognition for tax purposes of
losses incurred in certain closing transactions in options and futures.
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One of the requirements for qualification as a regulated investment company is
that less than 30% of the Fund's gross income may be derived from gain from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in effecting closing transactions within
three months after entering into an option or futures contract.
In general, gain from "foreign currencies" and from foreign currency options,
foreign currency futures contracts and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
regulated investment company. It is currently unclear, however, who will be
treated as the issuer of a foreign currency instrument or how foreign currency
options, futures contracts or forward foreign currency contracts will be valued
for purposes of the regulated investment company diversification requirements
applicable to the Fund.
Under Code Section 988, special rules are provided for certain transactions in a
foreign currency other than the taxpayer's functional currency (I.E., unless
certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gain or loss from certain forward contracts not traded
in the interbank market, from futures contracts that are not "regulated futures
contracts," and from unlisted options will be treated as ordinary income or loss
under Code Section 988. In certain circumstances, the Fund may elect capital
gain or loss treatment for such transactions. In general, however, Code Section
988 gain or loss will increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to shareholders as ordinary
income. Additionally, if the Code Section 988 loss exceeds other investment
company taxable income during a taxable year, the Fund would not be able to make
any ordinary dividend distributions, and any distributions made before the loss
was realized but in the same taxable year would be recharacterized as a return
of capital to shareholders, thereby reducing each shareholder's basis in his or
her Fund shares.
The Trust is required to report to the Internal Revenue Service ("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 the withholding of federal income tax at a rate of
31% ("backup withholding") in the case of non-exempt shareholders if: (i) the
shareholder fails to furnish the Trust with and to certify the shareholder's
correct taxpayer identification number or social security number; (ii) the IRS
notifies the Trust that the shareholder has failed to report properly 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
it 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 advisors 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, foreign, state and local taxation.
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 series, 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 to its present name. The Trust is registered as an open-end management
investment company under the 1940 Act.
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Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. 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.
CAPITALIZATION AND VOTING
The Trust has authorized 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 is 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.
Shares of the Fund are fully paid and 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. Each shareholder of record
is entitled to one vote for each full share held (and a fractional vote for each
fractional share held). Shares of each series 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 series
vote together in the election of Trustees and ratification of the selection of
independent accountants. Shareholders of any particular series or class are not
entitled to vote on any matters as to which such series is not 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. Similarly, the selection of independent 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 independent accountants
if the employment of the Trust's independent 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
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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.
PRINCIPAL SHAREHOLDERS
As of February 24, 1997, the following persons owned of record or beneficially
5% or more of the Fund's shares:
SHAREHOLDER SHARE BALANCE PERCENT OF FUND
- ----------- ------------- ---------------
INVESTOR SHARES
The Robert Wood Johnson Foundation 4,917,050.504 30.17%
P.O. Box 2316
College Road at Route One
Princeton, NJ 08543
University of Chicago 3,388,253.056 20.79%
450 North Cityfront Plaza Drive
Chicago, IL 60611
GOOSS & CO 1,116,866.431 6.85%
c/o Chase Manhattan Bank
1211 6th Ave, 35th Floor
New York, NY 10036
Saxon & Co 1,604,506.853 6.53%
PO Box 7780-1888
Philadelphia, PA 19182
Northwest Area Foundation 822,372.923 5.05%
E-12-01 First National Bank Building
332 Minnesota Street
St. Paul, MN 55101-1373
ADVISOR SHARES
Montgomery Securities 1,116,871.724 100.00%
600 Montgomery St., 4th Floor
San Francisco, CA 94111
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.
Quotations of average annual total return are expressed in terms of the average
annual compounded rate of return of a hypothetical investment in a class of the
Fund over periods of 1, 5 and 10 years (since commencement of operations),
calculated pursuant to the following formula:
n
P (1+T) = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of Fund and any class expenses (net of
certain reimbursed expenses) on
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an annual basis and will assume that all dividends and distributions are
reinvested in shares of the same class when paid.
For the one-year and since inception periods ended October 31, 1996, the average
annual total return of the Fund's Investor Shares was 4.22% and 6.66%,
respectively. For the same periods, no Advisor Shares were issued.
Quotations of cumulative total return will reflect only the performance of a
hypothetical investment in a class of the Fund during the particular time period
shown. Cumulative total returns vary based on changes in market conditions and
the level of the Fund's and any applicable class expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
In connection with communicating cumulative total return to current or
prospective investors, these figures may also be compared with the performance
of other mutual funds tracked by mutual fund rating services or to 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 a class 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 Service Organization and
the investor, with respect to the customer services provided by the Service
Organization: (i) account fees (a fixed amount per month or per year); (ii)
transaction fees (a fixed amount per transaction processed); (iii) compensating
balance requirements (a minimum dollar amount a customer must maintain in order
to obtain the services offered); or (iv) 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 have the effect of reducing the average annual
or cumulative total returns for those investors.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Custody Division located in
London, England, acts as custodian of the Portfolio's assets but plays no role
in making decisions as to the purchase or sale of portfolio securities for the
Portfolio. Pursuant to rules adopted under the 1940 Act, the Portfolio may
maintain its foreign securities and cash in the custody of certain eligible
foreign banks and securities depositories. Selection of these foreign custodial
institutions is made by the Core Trust Board following a consideration of a
number of factors, including (but not limited to) the reliability and financial
stability of the institution; the ability of the institution to perform capably
custodial services for the Fund; the reputation of the institution in its
national market; the political and economic stability of the country in which
the institution is located; and further risks of potential nationalization or
expropriation of Portfolio assets.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
FFC, Portland, Maine, acts as the Fund's transfer agent and dividend disbursing
agent.
LEGAL COUNSEL
Jacobs Persinger & Parker, 77 Water Street, New York, New York 10005, counsel
to the Fund, passes upon certain legal matters in connection with the shares
offered by the Fund.
INDEPENDENT ACCOUNTANT
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. Securities and Exchange Commission filings. Their address is
One Post Office Square, Boston, Massachusetts 02109.
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REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Trust's registration statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus 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 audited Statement of Assets and Liabilities, Statement of Operations,
Statements of Changes in Net Assets, Statement of Investments, notes thereto,
and Financial Highlights of the Fund for the period from commencement of
operations through October 31, 1995 and fiscal 1996 and the Report of
Independent Accountants thereon (included in the Annual Report to shareholders),
which are delivered along with this SAI, are incorporated herein by reference.
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APPENDI
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 & POOR'S
FIXED-INCOME SECURITY RATINGS
An S&P's fixed-income security rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or obtained
by S&P's 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.
A-1
<PAGE>
"AAA" Fixed-income securities ated "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.
A-2
<PAGE>
COUNTRIES EXCLUDED FRO EMERGING MARKET CATEGORY
Australia Japan
Austria Malaysia
Belgium Netherlands
Canada New Zealand
Denmark Norway
Finland Singapore
France Spain
Germany Sweden
Hong Kong Switzerland
Ireland United Kingdom
Italy USA
A-3
<PAGE>
SCHRODER U.S. EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997, AS AMENDED APRIL 15, 1997
- --------------------------------------------------------------------------------
[MAP]
INVESTMENT ADVISER AND ADMINISTRATOR
Schroder Capital Management International Inc. ("SCMI")
DISTRIBUTOR
Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUBADMINISTRATOR
Forum Administrative Services, Limited Liability Company ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder U.S. Equity 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 herein). Advisor Shares
incur more 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 Prospectus dated March 1, 1997, as amended 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.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . 3
Convertible Securities. . . . . . . . . . . . . . . . . . . . . 3
Temporary Defensive and Operating Investments . . . . . . . . . 4
U.S. Government Securities. . . . . . . . . . . . . . . . . . . 4
Illiquid and Restricted Securities. . . . . . . . . . . . . . . 5
Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Loans of Portfolio Securities . . . . . . . . . . . . . . . . . 5
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . 6
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Officers and Trustees . . . . . . . . . . . . . . . . . . . . . 7
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . 9
Subadministrator. . . . . . . . . . . . . . . . . . . . . . . .10
Distribution of Fund Shares . . . . . . . . . . . . . . . . . .10
Service Organizations . . . . . . . . . . . . . . . . . . . . .11
Portfolio Accounting. . . . . . . . . . . . . . . . . . . . . .12
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . .12
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . .13
Investment Decisions. . . . . . . . . . . . . . . . . . . . . .13
Brokerage and Research Services . . . . . . . . . . . . . . . .13
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . .15
Determination of Net Asset Value per Share. . . . . . . . . . .15
Redemption In-Kind. . . . . . . . . . . . . . . . . . . . . . .15
TAXATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .17
Organization. . . . . . . . . . . . . . . . . . . . . . . . . .17
Capitalization and Voting . . . . . . . . . . . . . . . . . . .17
Principal Shareholders. . . . . . . . . . . . . . . . . . . . .18
Performance Information . . . . . . . . . . . . . . . . . . . .18
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Transfer Agent and Dividend Disbursing Agent. . . . . . . . . .19
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . .19
Independent Accountant. . . . . . . . . . . . . . . . . . . . .19
Registration Statement. . . . . . . . . . . . . . . . . . . . .19
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . .20
APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
2
<PAGE>
INTRODUCION
Schroder U.S. Equity Fund is a diversified, separately managed series of
Schroder Capital Funds (Delaware) (the "Trust"), an open-end management
investment company currently consisting of five separate series, each of which
has a different investment objective and policies.
The Fund's investment objective is to seek growth of capital. There is no
assurance that this objective will be achieved. The Fund invests at least 65%
of its total assets, and normally expect to invest substantially all its assets,
in common stocks, and securities convertible into common stock, of U.S. issuers.
The Fund also may invest in warrants or other rights to purchase common stock,
and to a lesser extent in non-convertible preferred stock and debt securities.
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 Objective" and "Investment Policies" in the Prospectus. The
following information supplements the discussion in those sections by providing
additional information or elaborating upon the discussion there.
The Fund is a "diversified" portfolio and, as such, at least 75% of its total
assets must be represented by cash and cash items, Government securities and
securities limited in respect of any one issuer to not more than 5% of the
Fund's total assets and to not more than 10% of the voting securities of such
issuer. The classification of the Fund as diversified under the Investment
Company Act of 1940 (the "1940 Act") cannot be changed without the majority
approval of the Fund's shareholders. As used in this SAI, "majority approval of
the Fund's shareholders" means approval of the lesser of: (i) 67% or more of
the Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund.
The investment objective of the Fund set forth in the Prospectus is a
fundamental policy of the Fund, meaning that it cannot be changed without
majority approval of the Fund's shareholders. A non-fundamental policy could be
changed by the Trust's Board of Trustees (the "Trust Board") without such prior
shareholder approval. Unless otherwise indicated, all of the investment
policies of the Fund described below are also fundamental policies.
The Fund generally purchases securities that are believed to have potential for
capital appreciation. Securities, however, are disposed of in situations where
the Fund's investment adviser believes that such potential is no longer feasible
or the risk of decline in market price is too great. Pursuant to this policy,
the Fund has invested, and normally will invest, substantially all its assets in
common stocks and securities convertible into common stock. The Fund also may
invest in other securities with common stock purchase warrants attached or in
such warrants or other rights to purchase common stock. The Fund also may
invest to a limited degree in non-convertible preferred and debt securities.
Such investments might be made at such times as in the opinion of management
substantially greater yields could be earned on such securities of investment
grade than on U.S. Government securities and bank certificates of deposit. As a
non-fundamental policy, the Fund will not invest more than 15% of its total
assets in such non-convertible preferred and debt securities.
CONVERTIBLE SECURITIES
The Fund may invest in convertible preferred stocks and convertible debt
securities ("convertible securities"). A convertible security is a bond,
debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or formula.
Convertible securities rank senior to common stocks in a corporation's capital
structure and, therefore, carry less risk than the corporation's common stock.
The value of a convertible security is a function of its "investment value" (its
value as if it did not have a conversion privilege), and its "conversion value"
(the security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
3
<PAGE>
TEMPORARY DEFENSIVE AND OPERATING INVESTMENTS
For temporary defensive purposes, the Fund may invest all or any portion of its
assets in investment-grade corporate bonds or debentures (meaning for these
purposes bonds or debentures rated "A" or better by Standard & Poor's ("S&P") or
the equivalent thereof), preferred stock, U.S. Government securities or bank
certificates of deposit. (According to S&P, bonds rated "A" have a strong
capacity to pay principal and interest although they are somewhat more
susceptible to the adverse effect of changes in circumstances and economic
conditions.) The conditions under which the Fund may so invest for temporary
defensive purposes will be at times when in the opinion of the investment
adviser, the market appears relatively fully priced or uncertain economic
conditions indicate the advisability of assuming such a temporary defensive
position.
As an operating, non-fundamental policy, the Fund also may invest temporarily in
certain short-term fixed-income securities. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions or other Fund obligations. Such securities might include U.S.
Government securities, commercial paper, bank certificates of deposit, time
deposits and bankers acceptances, and repurchase agreements collateralized by
such securities. The Fund will limit its total investment at any time in these
securities for this operating purpose to not more than 25% of its total assets.
Certain of the securities in which the Fund may invest for either of the
foregoing temporary purposes are more fully described as follows:
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the U.S. Government
(or its agencies, instrumentalities or government-sponsored enterprises) that
have remaining maturities not exceeding one year. Agencies, instrumentalities
and government-sponsored enterprises that issue or guarantee debt securities
have been established or sponsored by the U.S. Government and 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, instrumentalities or government-sponsored enterprises referred
to above are 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. These securities consist of certificates of deposit and
bankers' acceptances issued by U.S. banks having total assets at the time of
purchase in excess of $1 billion. Such banks must be members of the Federal
Deposit Insurance Corporation. 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. The foregoing limitation as to banks in whose obligations the Fund may
invest is a non-fundamental policy of the Fund. The Fund also may invest in
time deposits issued by a bank in exchange for the deposit of funds. Similar to
a certificate of deposit, a time deposit earns a specified rate of interest over
a definite time period; however, it cannot be traded in the secondary market.
COMMERCIAL PAPER. These instruments are short-term unsecured promissory notes
issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund for temporary purposes
consists of direct obligations of domestic issuers that, at the time of
investment, are rated "P-1" by Moody's Investor Services ("Moody's") or "A-1" by
S&P, or securities, if not rated, are issued by companies having an outstanding
debt issue currently rated "Aaa" or "Aa" by Moody's or "AAA" or "AA" by S&P.
The rating "P-1" is the highest commercial paper rating assigned by Moody's, and
the rating "A-1" is the highest commercial paper rating assigned by S&P. Such
limitations with respect to commercial paper constitute a non-fundamental policy
of the Fund.
4
<PAGE>
REPURCHASE AGREEMENTS. The Fund may invest in securities subject to repurchase
agreements that mature or may be terminated by notice in seven days or less
(normally one day) with member banks of the Federal Reserve System or certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers or their affiliates. In a typical repurchase agreement, the seller of a
security commits itself at the time of the sale to repurchase such security from
the buyer at a mutually agreed-upon time and price. The repurchase price
exceeds the sale price, reflecting an agreed-upon interest rate effective for
the period the buyer owns the security subject to repurchase. The agreed-upon
rate is unrelated to the interest rate on the underlying security. The value of
the underlying collateral is monitored by the Fund's investment adviser at all
times during the term of the repurchase agreement to insure that the value of
the collateral always equals or exceeds the repurchase price. In the event of
default by the seller under the repurchase agreement, the Fund may have
difficulties in exercising its rights to the underlying collateral and may incur
costs and experience time delays in connection with the disposition of such
collateral. To evaluate potential risks, the investment adviser reviews the
creditworthiness of those banks and dealers with which the Fund enters into
repurchase agreements. The foregoing policy with respect to repurchase
agreements is a non-fundamental policy of the Fund.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Investment Policies" in the
Prospectus sets forth the circumstances in which the Fund may invest in
"restricted securities." In connection with the Fund's original purchase of
restricted securities, it may negotiate rights with the issuer to have such
securities registered for sale at a later time. Further, the registration
expenses of illiquid restricted securities may also be negotiated by the Fund
with the issuer at the time such securities are purchased by the Fund. When
registration is required, however, a considerable period may elapse between the
decision to sell the securities and the time the Fund would be permitted to sell
such securities. A similar delay might be experienced in attempting to sell
such securities pursuant to an exemption from registration. Thus, the Fund may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
LEVERAGE
The Fund is authorized to borrow money from a bank on its promissory note or
other evidence of indebtedness. Monies borrowed would be invested and any
appreciation thereon, to the extent it exceeded interest paid on the loan, would
cause the net assets value of Fund shares to rise faster than it would
otherwise. If, however, the investment performance of additional monies failed
to cover the Fund's interest charges, the net asset value would decrease faster
than would otherwise be the case. This is the speculative feature known as
"leverage". Any such borrowing: (i) would not exceed one-third of the value of
the Fund's total assets after borrowing; (ii) if at any time it exceeded such
one-third limitation, the Fund would within three days thereafter (not including
Sundays or holidays) or such longer period as the Securities and Exchange
Commission may prescribe by rules and regulations, reduce its borrowings to the
limitation; and (iii) might or might not be secured and, if secured, all or any
part of the Fund's assets could be pledged. To comply with such limitations,
the Fund might be required to dispose of certain assets when it might be
disadvantageous to do so. Any such borrowings would be subject to Federal
Reserve Board regulations. The Fund has not borrowed money for investment or
any other purpose during the last ten years and, as a non-fundamental policy,
will not borrow for investment in the future.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities subject to the restrictions stated in
the Prospectus. Under applicable regulatory requirements (which are subject to
change), the loan collateral must: (i) on each business day, at least equal the
market value of the loaned securities; and (ii) consist of cash, bank letters of
credit, U.S. Government securities, other cash equivalents or liquid equity
securities in which the Fund is permitted to invest. To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the
issuing bank must be satisfactory to the Fund. When lending portfolio
securities, the Fund receives from the borrower an amount equal to the interest
paid or the dividends declared on the loaned securities during the term of the
loan plus the interest on the collateral securities (less any finders' or
administrative fees the Fund pays in arranging the loan). The Fund may share
the interest it receives on
5
<PAGE>
the collateral securities with the borrower if it realizes at least a minimum
amount of interest required by the lending guidelines established by the Trust
Board. The Fund will not lend its portfolio securities to any officer,
director, employee or affiliate of the Fund or SCMI. The terms of the Fund's
loans must meet certain tests under the Internal Revenue Code and permit the
Fund to reacquire loaned securities on five business days' notice or in time to
vote on any important matter.
Portfolio securities purchased with cash collateral are subject to possible
depreciation. Loans of securities by the Fund will be subject to termination at
the Fund's or the borrower's option. The Fund may pay reasonable negotiated
fees in connection with loaned securities, so long as such fees are set forth in
a written contract and approved by the Trust Board.
INVESTMENT RESTRICTIONS
The following investment restrictions are in addition to those described under
"The Fund -- Investment Restrictions" in the Prospectus. These restrictions,
which are fundamental policies (except as set forth), provide that the Fund:
1. Will not issue senior securities except that it may borrow money from
a bank on its promissory Fund's total assets after the borrowing; (ii)
if at any time it exceeded such one-third limitation, the Fund would
within three days thereafter (not including Sundays or holidays) or
such longer period as the Securities and Exchange Commission may
prescribe by rules and regulations, reduce its borrowings to the
limitation; and (iii) might or might not be secured and, if secured,
all or any part of the Fund's assets could be pledged. To comply with
such limitations, the Fund might be required to dispose of certain
assets when it might be disadvantageous to do so. Any such borrowings
would be subject to Federal Reserve Board regulations. (As a
non-fundamental policy, the Fund will not borrow for investment
purposes.)
2. Will not effect short sales, purchase any security on margin or write
or purchase put and call options.
3. Will not acquire more than 10% of the voting securities of any one
issuer.
4. Will not invest 25% or more of the value of its total assets in any
one industry.
5. Will not engage in the purchase and sale of illiquid interests in real
estate, including illiquid interests in real estate investment trusts.
6. Will not engage in the purchase and sale of commodities or commodity
contracts.
7. Will not invest in companies for the purpose of exercising control or
management.
8. Will not underwrite securities of other issuers, except that the Fund
may acquire portfolio securities, not in excess of 10% of the value of
its total assets, under circumstances where if sold it might be deemed
to be an underwriter for the purposes of the Securities Act of 1933.
9. Will not make loans to other persons except that it may purchase
evidences of indebtedness of a type distributed privately to financial
institutions but not in excess of 10% of the value of its total
assets.
10. Will not acquire securities described in 8 and 9 above which in the
aggregate exceed 10% of the value of the Fund's total assets.
11. Will not invest in other investment companies.
As non-fundamental policies, the Fund: (i) will not invest more than 10% of its
total assets in illiquid securities, including securities described in items 8
and 9 above and repurchase agreements maturing more than seven days; and (ii)
will not engage in writing, buying or selling of stock index futures, options on
stock index futures, financial futures contracts or options thereon.
6
<PAGE>
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, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
RALPH E. HANSMANN (Honorary), 40 Wall Street, New York, New York - Honorary
Trustee of the Trust - Private investor; Director, First Eagle Fund of America,
Inc.; Director, Verde Exploration, Ltd.; Trustee Emeritus, Institute for
Advanced Study; Trustee and Treasurer, New York Public Library; Life Trustee,
Hamilton College.
JOHN I. HOWELL, Greenwich, Connecticut - 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, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust - retired since March, 1988; prior thereto, consultant
to SCMI since February 1, 1984.
MARK J. SMITH (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a 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 Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON (b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a 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.
CATHERINE S. WOOLEDGE, 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.
BARBARA GOTTLIEB (c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ (b) (c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
7
<PAGE>
JOHN Y. KEFFER, Two Portland Square, Portland, Maine - Vice President of the
Trust. President of FFC, the Fund's transfer and dividend disbursing agent and
fund accountant and other affiliated entities including Forum Financial
Services, Inc. and Forum Advisors, Inc.
JANE P. LUCAS (c), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 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.
THOMAS G. SHEEHAN, 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, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO (b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 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; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 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; 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.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) 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.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive
an annual fee of $1,000 and a fee of $250 for each meeting of the Trust 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 Fund has no bonus,
profit sharing, pension or retirement plans.
8
<PAGE>
The following table provides the fees paid to each Trustee of the Trust for the
fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrued Retirement From Trust And
As Part of Trust Fund Complex
Expenses Paid To Trustees
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $1,750
Mr. Hansmann 1,375 0 0 1,375
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 February 15, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Fund's outstanding shares.
While 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
U.S. civil judgments against them. Civil remedies and criminal penalties under
U.S. federal securities laws may be unenforceable in the United Kingdom.
Extradition treaties now in effect between the U.S. and the United Kingdom might
not subject such persons to effective enforcement of the criminal penalties of
such acts.
INVESTMENT ADVISER
SCMI, 787 Seventh Avenue, New York, New York 10019, serves as investment adviser
to the Fund under an Investment Advisory Agreement between the Trust and SCMI.
SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the wholly
owned U.S. holding company subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large world wide group of banks and financial
service companies (referred to as the "Schroder Group"), with associated
companies and branch and representative offices in eighteen countries. The
Schroder Group specializes in providing investment management services, with
funds under management currently in excess of $150 billion as of December 31,
1996.
Under the Investment Advisory Agreement, SCMI manages the investment and
reinvestment of the Fund's assets and continuously reviews, supervises and
administers its investments. In this regard, it is the responsibility of SCMI
to make decisions relating to the Fund's investments and to place purchase and
sale orders regarding such investments with brokers or dealers selected by it in
its discretion. SCMI also furnishes to the Trust Board, which has overall
responsibility for the business and affairs of the Trust, periodic reports on
the investment performance of the Fund.
Under the terms of the Investment Advisory Agreement, SCMI is required to manage
the Fund's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
inside information that may be in its possession or in the possession of its
affiliates.
The Investment Advisory Agreement continues in effect provided such continuance
is approved annually: (i) by the holders of a majority of the outstanding
voting securities of the Fund or by the Trust 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 Fund on 60 days' written notice to the investment adviser, or by the
investment adviser on 60 days' written notice to the Trust, and it terminates
automatically if assigned. The Investment Advisory Agreement also provides
that, with respect to the Fund, neither SCMI nor its personnel shall be liable
for any error of judgment
9
<PAGE>
or mistake of law or for any act or omission in the performance of duties to the
Fund, except for willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of any obligations and
duties under the Investment Advisory Agreement.
Under the terms of the Investment Advisory Agreement, SCMI is entitled to
receive a fee for its services, computed daily and payable monthly, at the
annual rate of 0.75% of the first $100 million of the Fund's average daily net
assets and 0.50% of the Fund's average daily net assets in excess of $100
million. It is the Trust's understanding that although other mutual funds pay
investment advisory fees at annual rates of 0.75% or more of their average net
assets (or a portion thereof), the majority of other mutual funds, regardless of
size, pay advisory fees at rates lower than 0.75% of any portion of their
average net assets. For the fiscal years ended October 31, 1994, 1995 and 1996,
SCMI was paid advisory fees by the Fund an aggregate of $144,539, $140,988 and
$135,128 (after waivers of $4,355), respectively.
SUBADMINISTRATOR
On behalf of the Fund, the Trust has entered into a Subadministration Agreement
with Forum. Under the Subadministration Agreement, Forum provides certain
management and administrative services necessary for the Fund's operations,
other than the investment management and administrative services provided to the
Fund by SCMI pursuant to the Investment Advisory Agreement, including among
other things: (i) preparation of shareholder reports and communications; (ii)
regulatory compliance, such as reports to and filings with the Securities and
Exchange Commission and state securities commissions; and (iii) general
supervision of the operation of the Fund, including coordination of the services
performed by the Fund's investment adviser, transfer agent, custodian,
independent accountants, legal counsel and others. 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 Fund.
Under the Subadministration Agreement, Forum is entitled to receive a fee,
computed daily and payable monthly, at the annual rate of 0.10% of the Fund's
average daily net assets. The Trust, SCMI and Schroder Advisors formerly had
entered into a Sub-Administration Agreement with Forum Financial Services, Inc.
("FFSI") that had substantially similar terms and provisions in all material
respects to the current Subadministration Agreement except as to the
circumstances under which the fees were paid. Specifically, payment for FFSI's
services was made by SCMI and was not a separate expense of the Fund. For the
fiscal year ended October 31, 1996, Forum was paid $18,598 for subadministration
services.
DISTRIBUTION OF FUND SHARES
Schroder Advisors, 787 Seventh Avenue, New York, New York 10019, serves as
Distributor of the Fund shares pursuant 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 to pay from its own
resources all costs and expenses incident to the sale and distribution of Fund
shares including expenses of printing and distribution to prospective investors
of prospectuses and other sales materials and 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
10
<PAGE>
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. .
The maximum annual amount currently payable under the Plan is 0.25%, but 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. 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 Fund may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services to 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 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 will be a Service Organization
or receive fees for servicing. The Fund has no intention of making any such
payments to Service Organizations with respect to accounts of institutional
investors and, in any event, will make no such payments until the Trust Board
specifically so authorizes.
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.
11
<PAGE>
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 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.
PORTFOLIO ACCOUNTING
FFC, 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 FFC or by FFC upon 60 days'
written notice to the Trust.
Under its agreement, FFC prepares and maintains 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 Securities and Exchange Commission. For its services, FFC 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. FFC is entitled to an additional $24,000 per year
with respect to global and international funds. In addition, FFC is paid an
additional $12,000 per year with respect to tax-free money market funds and
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.
FFC 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. FFC 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 FFC and, its employees, agents, officers and directors against
and from any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses arising out of
or in any way related to FFC'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 FFC by an officer of the Trust duly
authorized. This indemnification does not apply to FFC's actions taken or
failures to act in cases of FFC's own bad faith, willful misconduct or gross
negligence.
For the fiscal years ended October 31, 1994, 1995 and 1996, the Fund paid fund
accounting fees of $31,596, $38,000 and $36,000, respectively.
FEES AND EXPENSES
The Fund bears all costs of its operations other than expenses specifically
assumed by Schroder Advisors or SCMI. The costs borne by the Fund include 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 and pricing of the Fund's shares; a portion of the
expenses of maintaining the Fund's legal existence and of shareholders'
meetings; and expenses of preparation and distribution to existing shareholders
of reports, proxies and prospectuses. Trust expenses directly attributed to the
Fund are charged to the Fund; other expenses are allocated proportionately among
all the series of the Trust in relation to the net assets of each series.
12
<PAGE>
PORTFOLIO TRANSACTIONS
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment advisory clients
of SCMI are made with a view to achieving their respective investment
objectives. Investment decisions are the product of many factors in addition to
basic suitability for the particular client involved, and a particular security
may be bought or sold for other clients at the same time. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. In some instances, one client may sell a
particular security to another client. It also sometimes happens that two or
more clients simultaneously purchase or sell the same security, in which event
each day's transactions in such security are, insofar as is possible, averaged
as to price and allocated between such clients in a manner 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
Decisions with respect to allocation of portfolio brokerage are made by the
Trust's President, a Vice President or Treasurer.
The Investment Advisory Agreement authorizes and directs SCMI to place orders
for the purchase and sale of the Fund's investments with brokers and 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 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 may deem relevant (including price,
transaction size, the nature of the market for the security, the commission
amount, the timing of the transaction (taking into account market prices and
trends), the reputation, experience and financial stability of the
broker-dealers involved, and the quality of service rendered by the
broker-dealers in other transactions.
It is the Fund's policy, consistent with the best execution, to secure the
highest possible price on sales and the lowest possible price on purchases of
securities. Transactions on U.S. stock exchanges and other agency transactions
involve the payment of negotiated brokerage commissions. Over-the-counter
purchases and sales are transacted directly with principal market makers except
in those circumstances where in the opinion of the Trust's officers better
prices and executions are available elsewhere. Portfolio transactions are
frequently placed with broker-dealers who provide SCMI with research and
statistical assistance. The assistance may include advice as to the
advisability of investing in securities, security analysis and reports, economic
studies, industry studies, receipt of quotations for portfolio valuations and
similar services.
It has for many years been a common practice in the investment advisory business
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 each, include such items as general economic and security
market review, 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 investment advisory fee paid by the Fund is not reduced
because SCMI and its affiliates receive such services.
As permitted by Section 28(e) of the 1934 Act, SCMI may cause the Fund to pay a
broker-dealer that provides SCMI with "brokerage and research services" (as
defined in the Act) an amount of disclosed commission for
13
<PAGE>
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
In addition, SCMI may allocate brokerage transactions to broker-dealers who have
entered into arrangements under which the broker-dealer allocates a portion of
the commission paid by the Fund toward payment of Fund expenses, such as
custodian fees.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such other policies as the Trustees may determine, SCMI may
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute portfolio transactions for the Fund.
Subject to the general policies of the Fund regarding allocation of portfolio
brokerage as set forth above, the Trust Board has authorized the Fund to employ
Schroder Wertheim & Company, Incorporated ("Schroder Wertheim"), an affiliate of
SCMI, to effect securities transactions of the Fund, on the New York Stock
Exchange only, provided certain other conditions are satisfied as described
below.
Payment of brokerage commissions to Schroder Wertheim for effecting such
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on a national securities
exchange 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 will in the judgment of the officers of the Trust responsible for
making portfolio decisions and selecting brokers, be: (i) at least as favorable
as commissions contemporaneously charged by Schroder Wertheim on comparable
transactions for its most favored unaffiliated customers; and (ii) at least as
favorable as those which would be charged on comparable transactions by other
qualified brokers having comparable execution capability. The Trust Board,
including a majority of the non-interested Trustees, has adopted procedures
pursuant to Rule 17e-1 promulgated by the Securities and Exchange Commission
under Section 17(e) to ensure that commissions paid to Schroder Wertheim by the
Fund satisfy the foregoing standards. The Trust Board will review all
transactions at least quarterly for compliance with these procedures.
The Fund 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.
It is further a policy of the Fund that all such transactions effected for
the Fund by Schroder Wertheim on the New York Stock Exchange be in accordance
with Rule 11a2-2(T) promulgated 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 Fund to the brokers executing the Fund transactions on the New York Stock
Exchange. In accordance with Rule 11a2-2(T), the Trust Board has entered into
an agreement with Schroder Wertheim permitting it to retain a portion of the
brokerage commissions paid to it by the Fund. This agreement has been approved
by the Trust Board, including a majority of the non-interested Trustees.
During the fiscal years ended October 31, 1994, 1995 and 1996 the total
brokerage commissions paid by the Fund on portfolio transactions were $23,579,
$31,381 and $31,868 respectively. These amounts do not include any spreads or
concessions on principal transactions on a net trade basis. Substantially all
of such commissions were paid to firms which provided SCMI with research and
statistical assistance. No commissions were paid to Schroder Wertheim during
any of the fiscal years ended October 31, 1994, 1995 and 1996.
14
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DETERMINATION OF NET ASSET VALUE PER SHARE
The net asset value per share of the Fund is calculated as of 4:00 p.m. (Eastern
time), Monday through Friday, on each day that the New York Stock Exchange is
open for trading (which excludes the following national business holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day).
Portfolio securities listed on the New York Stock Exchange are valued on the
basis of the last sale on that date on the basis of information obtained from
authoritative sources at the end of the business day. Lacking any sales, they
are valued at the average of the closing bid and asked prices. Securities not
listed on such exchange are valued by the use of quotations on any other
national stock exchange on which the securities are listed, or if unlisted,
published quotations in common use and/or quotations from a market maker or
makers in the security, in each case on the basis of information obtained from
authoritative sources, or if securities for which no quotations are available,
including restricted securities, by such other method as the Trust Board, in
good faith, shall deem to reflect their fair value. If securities are listed on
more than one national stock exchange (other than the New York Stock Exchange),
they are valued on the basis of quotations on the national stock exchange in
which the primary market for the securities exists.
REDEMPTION IN-KIND
In the event that payment for redeemed shares is made wholly or partly in
portfolio securities, shareholders 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 portfolio
securities could result in a less diversified portfolio of investments for the
Fund and could affect adversely the liquidity of the investment portfolio of the
Fund.
TAXATION
Under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund and
each other series established from time to time by the Trust Board is treated as
a separate taxpayer for federal income tax purposes with the result that: (i)
each such series must meet separately the income and distribution requirements
for qualification as a regulated investment company; and (ii) the amounts of
investment income and capital gain earned will be determined on a
series-by-series (rather than on a Trust-wide) basis.
The Fund qualified for its last fiscal year as a regulated investment company
under Subchapter M of the Code and intends to so qualify each year so long as
such qualification is in the best interests of its shareholders. To do so, the
Fund intends to distribute to shareholders at least 90% of its "investment
company taxable income" as defined in the Code (which includes, among other
items, dividends, interest and the excess of any net short-term capital gain
over net long-term capital loss), and to meet certain diversification of assets,
source of income, and other requirements of the Code. By so doing, the Fund will
not be subject to federal income tax on its investment company taxable income
and "net capital gain" (the excess of net long-term capital gain over net
short-term capital loss) 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 gain or loss) for the calendar year; (ii) at least 98% of
the excess of its capital gain over capital loss realized during the one-year
period ending October 31 of such year; and (iii) all such ordinary income and
capital gain for previous years that were not distributed during such years. A
distribution will be treated as paid during the calendar year if it is
15
<PAGE>
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 the calendar year in which the
distributions are received.
Distributions of investment company taxable income (including net realized
short-term capital gain) are taxable to shareholders as ordinary income.
Generally, dividends of investment income (but not capital gain) from the Fund
will qualify for the federal 70% dividends-received deduction for corporate
shareholders to the extent such dividends do not exceed the aggregate amount of
dividends received by the Fund from domestic corporations, provided the Fund
shares are held by said shareholders for more than 45 days. If securities held
by the Fund are considered to be "debt-financed" (generally, acquired with
borrowed funds), are held by the Fund for less than 46 days (91 days in the case
of certain preferred stock), or are subject to certain forms of hedges or short
sales, the portion of the dividends paid by the Fund that corresponds to the
dividends paid with respect to such securities will not be eligible for the
corporate dividends-received deduction.
Distributions of net long-term capital gain are taxable to shareholders as
long-term capital gain, regardless of the length of time 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 distributions have been paid will, to the extent of such
capital-gain distributions, 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 of 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. If a
distribution reduces 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, which will be returned to the investor in the form
of a taxable distribution.
Upon redemption or sale of his shares, a shareholder will realize a taxable gain
or loss, which 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.
Ordinary income dividends paid by the Fund to shareholders who are nonresident
aliens is subject to a 30% U.S. withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable treaty law.
Nonresident shareholders are urged to consult their own tax advisors concerning
the applicability of the U.S. withholding tax.
The Trust is required to report to the Internal Revenue Service (the "IRS") all
distributions as well as gross proceeds from the redemption of the 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 non-exempt shareholders if:
(i) the shareholder fails to furnish the Trust with and to certify the
shareholder's correct taxpayer identification number or social security number;
(ii) the IRS notifies the Trust that the shareholder has failed to report
properly 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 it 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
16
<PAGE>
may be credited against the shareholder's federal income tax liability.
Investors may wish to consult their tax advisors 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 to its present name. The Trust is registered as an open-end management
investment company under the 1940 Act.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. 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.
CAPITALIZATION AND VOTING
The Trust has authorized an unlimited number of authorized 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 is borne
by the Trust. The Trust currently consists of five separate series, each of
which has separate investment objectives and policies, and two classes, Investor
Shares and Advisor Shares, in each series.
The shares of the Fund are fully paid and 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. Each
shareholder of record is entitled to one vote for each full share held (and a
fractional vote for each fractional share held). Shares of each series 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 series vote together in the election of Trustees and
ratification of the selection of independent accountants. Shareholders of any
particular series or class would not be entitled to vote on any matters as to
which such series or class were not 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
17
<PAGE>
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
independent 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 independent accountants if the employment of the Trust's independent
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, 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
to provide certain assistance 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,
for the purpose of enabling such holders to communicate with other shareholders
of the Trust with a view to obtaining the requisite signatures to request a
special meeting to consider such removal.
PRINCIPAL SHAREHOLDERS
As of February 24, 1997, the following persons owned of record or beneficially
5% or more of the Fund's shares:
SHAREHOLDER SHARE BALANCE PERCENT OF FUND
- ----------- ------------- ---------------
Gracechurch Co. 191,211.439 11.22%
75 Wall Street
New York, NY 10265
Schroder Nominees Limited 152,044.768 8.93%
120 Cheapside
London EC2V 6DS England
Wendel & Co. 110,983.024 6.52%
c/o The Bank of New York
Wall Street Station
New York, NY 10268
Fox & Co. 101,539.373 5.96%
P.O. Box 976
New York, NY 10268
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of total return data in
advertisements, sales literature 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:
n
P (1+T) = ERV
(Where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = 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 on an annual basis,
and will assume that all dividends and distributions are reinvested when paid.
For the one year, five year and ten year periods ended October 31, 1995, the
average annual total returns of the Fund were 17.68%, 17.50% and 13.09%,
respectively.
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.
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 which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
CUSTODIAN
All securities and cash of the Fund are held by The Chase Manhattan Bank, N.A.,
Chase MetroTech Center, Brooklyn, New York 11245.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
FFC, Portland, Maine, acts as the Fund's transfer agent and dividend disbursing
agent.
LEGAL COUNSEL
Jacobs Persinger & Parker, 77 Water Street, New York, New York 10005, counsel
to the Fund, passes upon certain legal matters in connection with the shares
offered by the Fund.
INDEPENDENT ACCOUNTANT
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. Securities and Exchange Commission filings. Their 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 Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
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<PAGE>
Statements contained herein and in the Prospectus 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 audited Statement of Assets and Liabilities, Statement of Operations,
Statements of Changes in Net Assets, Statement of Investments, notes thereto,
and Financial Highlights of the Fund for the fiscal year ended October 31, 1996
and the Report of Independent Accountants thereon (included in the Annual Report
to shareholders), which are delivered along with this SAI, are incorporated
herein by reference.
20
<PAGE>
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.
"A" Fixed-income securities which are rated "A" possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
The ratings apply to municipal commercial paper as well as taxable commercial
paper. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
"Prime-1", "Prime-2", "Prime-3".
Issuers rated "Prime-1" have a superior capacity for repayment of short-term
promissory obligations. Issuers rated "Prime-2" have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated "Prime-3" have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated "Not Prime" do not fall within any of the Prime rating categories.
STANDARD & POOR'S
FIXED-INCOME SECURITY RATINGS
A 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: (1) likelihood of
default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the
obligation; (2) nature of and provisions of the obligation; and (3) protection
A-1
<PAGE>
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.
"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.
"A" Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than fixed-income securities in higher-rated
categories.
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.
A-2
<PAGE>
SCHRODER INTERNATIONAL FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997, AS AMENDED APRIL 15, 1997
- --------------------------------------------------------------------------------
[MAP]
INVESTMENT ADVISER
Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUBADMINISTRATOR
Forum Administrative Services, Limited Liability Company ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder International 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 herein). Advisor Shares
are offered at lower investment minimums but incur more 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 Prospectus dated March 1, 1997, as amended 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.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . 3
Foreign Securities . . . . . . . . . . . . . . . . . . . . 3
Depository Receipts. . . . . . . . . . . . . . . . . . . . 4
Forward Foreign Currency Exchange Contracts. . . . . . . . 4
U.S. Government Securities . . . . . . . . . . . . . . . . 4
Bank Obligations . . . . . . . . . . . . . . . . . . . . . 4
Short-Term Debt Securities . . . . . . . . . . . . . . . . 5
Repurchase Agreements. . . . . . . . . . . . . . . . . . . 5
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . 5
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 6
Officers and Trustees. . . . . . . . . . . . . . . . . . . 6
Investment Adviser . . . . . . . . . . . . . . . . . . . . 9
Administrative Services. . . . . . . . . . . . . . . . . . 10
Distribution of Fund Shares. . . . . . . . . . . . . . . . 11
Service Organizations. . . . . . . . . . . . . . . . . . . 12
Portfolio Accounting . . . . . . . . . . . . . . . . . . . 12
Fees and Expenses. . . . . . . . . . . . . . . . . . . . . 13
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . 13
Investment Decisions . . . . . . . . . . . . . . . . . . . 13
Brokerage and Research Services. . . . . . . . . . . . . . 14
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . 15
Determination of Net Asset Value per Share . . . . . . . . 15
Redemption In-Kind . . . . . . . . . . . . . . . . . . . . 16
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . 16
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 18
Organization . . . . . . . . . . . . . . . . . . . . . . . 18
Capitalization and Voting. . . . . . . . . . . . . . . . . 19
Principal Shareholders . . . . . . . . . . . . . . . . . . 20
Performance Information. . . . . . . . . . . . . . . . . . 20
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . 21
Transfer Agent and Dividend Disbursing Agent . . . . . . . 21
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . 21
Independent Accountants. . . . . . . . . . . . . . . . . . 21
Registration Statement . . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . 21
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . A-1
2
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INTRODUCTION
Schroder International Fund (the "Fund") is a diversified, separately managed
series of Schroder Capital Funds (Delaware) (the "Trust"), an open-end
management investment company currently consisting of five separate series, each
of which has a different investment objective and policies.
The Fund's investment objective is long-term capital appreciation through
investment in securities markets outside the U.S. Investments in foreign
securities involve certain risks not associated with domestic investing, and
there can be no assurance that the Fund's objective will be achieved. The Fund
currently seeks to achieve its investment objective by holding, as its only
investment securities, the securities of International Equity Fund (the
"Portfolio"), a separate series of Schroder Capital Funds ("Schroder Core").
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 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 Objective and Policies" and "Additional Investment Policies and Risk
Considerations" in the Prospectus. The following information supplements the
"Investment Objectives" and "Investment Policies" sections of the Prospectus.
The Fund currently seeks to achieve its investment objective by investing all of
its investable assets in the Portfolio. Since the Fund has the same investment
objective and policies as the Portfolio and currently invests all of its assets
in the Portfolio, investment policies are discussed with respect to the
Portfolio only.
The Portfolio normally invests at least 65% of its total assets in equity
securities (including common and preferred stock, convertible securities,
depository receipts, and warrants or rights to purchase such equity securities)
of companies domiciled outside the U.S. Investments also may be made in debt
obligations of foreign governments, corporations and international or
supranational organizations (and their agencies or instrumentalities).
For temporary defensive purposes, to accumulate cash for investments, or to meet
anticipated redemptions, the Portfolio may invest in (or enter into repurchase
agreements with banks and broker dealers with respect to) short-term debt
securities, including Treasury bills and other U.S. Government securities, and
certificates of deposit, bankers' acceptances and time deposits of U.S. banks.
The Portfolio may also hold cash and time deposits in foreign banks, denominated
in any foreign or multinational currency.
In anticipation of foreign exchange requirements and to avoid losses due to
adverse movements in foreign currency exchange rates, the Portfolio also may
enter into forward contracts to purchase and sell foreign currencies.
FOREIGN SECURITIES
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 be less active than U.S. markets and trading may be thin: as a result
foreign securities prices may be more volatile. SCMI will generally invest only
in securities of companies and governments of countries which, 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 nationalization, increased taxation, or confiscation of
Portfolio assets.
3
<PAGE>
DEPOSITORY RECEIPTS
Investments in securities of foreign issuers may on occasion be in the form of
sponsored or unsponsored American Depository Receipts ("ADRs") or European
Depository Receipts ("EDRs"), or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued in the U.S. by a bank or trust
company, evidencing ownership of the underlying securities. EDRs are typically
issued in Europe under a similar arrangement. Generally, ADRs, in registered
form, are designed for use in the U.S. securities markets and EDRs, in bearer
form, are designed for use in European securities markets. Unsponsored ADRs may
be created without the participation of the foreign issuer. Holders of these
ADRs generally bear all the costs of the ADR facility, whereas foreign issuers
typically bear certain costs in a sponsored ADR. The bank or trust company
depository of an unsponsored ADR may be under no obligation to distribute
shareholder communications received from the foreign issuer or to pass through
voting rights.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
To protect or "hedge" against adverse price movements in the securities held in
its portfolio and the currencies in which they are denominated (as well as in
the securities it might wish to purchase and their denominated currencies), 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
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 such contracts tend
to minimize the risk of loss due to a decline in the value of the currency sold,
they expose the Portfolio to the risk that the counterparty is unable to perform
and they tend to limit gain that might result from an increase in the value of
the currency during the contract period.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in securities issued or guaranteed by the U.S.
Government (or its agencies, instrumentalities or government-sponsored
enterprises) that have remaining maturities not exceeding one year. Agencies,
instrumentalities and government-sponsored enterprises that issue or guarantee
debt securities have been established or sponsored by the U.S. Government and
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, instrumentalities or government-
sponsored enterprises referred to above are 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) whose total assets at the time of purchase
exceed $1 billion. Such banks must be members of the Federal Deposit Insurance
Corporation. The Portfolio also may hold cash and time deposits denominated in
any major currency in foreign banks.
The Portfolio also may 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 Trustees of
Schroder Core, are of comparable credit-worthiness and financial stature to U.S.
banks used by the Portfolio.
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
4
<PAGE>
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. A time deposit is a non-
negotiable receipt issued by a bank in exchange for the deposit of funds.
Similar to a certificate of deposit, a time deposit bears a specified rate of
interest over a definite time period; however, it cannot be traded in the
secondary markets.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper -- short-term unsecured promissory
notes issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Portfolio for temporary
defensive purposes consists of direct obligations of domestic issuers that at
the time of investment are rated "P-1" by Moody's Investors Service ("Moody's")
or "A-1" by Standard & Poor's ("S&P"), or securities which, if not rated, are
issued by companies having an outstanding debt issue currently rated "Aaa" or
"Aa" by Moody's or "AAA" or "AA" by S&P. The rating "P-1" is the highest
commercial paper rating assigned by Moody's and the rating "A-1" is the highest
commercial paper ratings assigned by S&P. 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.
REPURCHASE AGREEMENTS
The Portfolio may invest in securities subject to repurchase agreements that
mature or may be terminated by notice in seven days or less with U.S. banks or
broker-dealers. In a typical repurchase agreement the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed-upon time and price. The repurchase price exceeds
the sale price, reflecting an agreed-upon interest rate effective for the period
the buyer owns the security subject to repurchase. The agreed-upon rate is
unrelated to the interest rate on that security. SCMI monitors the value of the
underlying security at the time the transaction is entered into and at all times
during the term of the repurchase agreement to insure that the value of the
security always equals or exceeds the repurchase price. If a seller defaults
under a repurchase agreement, the Portfolio may have difficulty exercising its
rights to the underlying securities and may incur costs and experience time
delays in connection with the disposition of such securities. To evaluate
potential risks, SCMI reviews the credit-worthiness of banks and dealers with
which the Portfolio enters into repurchase agreements.
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 Portfolio's outstanding shares -- the Portfolio will not:
1. Invest more than 5% of its assets in the securities of any single
issuer. This restriction does not apply to securities issued by the
U.S. Government, its agencies or instrumentalities;
2. Purchase more than 10% of the voting securities of any one issuer;
3. Invest more than 10% of its assets in "illiquid securities"
(Securities that cannot be disposed of within seven days at their then
current value). For purposes of this limitation, "illiquid
securities" includes, except in those circumstances described below:
(i) "restricted securities", which are securities that cannot be
resold to the public without registration under federal securities
law; and (ii) securities of issuers (together with all predecessors)
having a record of less than three years of continuous operation;
4. Invest 25% or more of the value of its total assets in any one
industry;
5
<PAGE>
5. Borrow money, except from banks for temporary emergency purposes, and
then only in an amount not exceeding 5% of the value of the total
assets of the Portfolio;
6. Pledge, mortgage or hypothecate its assets to an extent greater than
10% of the value of its total assets;
7. Purchase securities on margin or sell short;
8. Make investments for the purpose of exercising control or management;
9. Purchase or sell real estate (provided that the Portfolio may invest
in securities issued by companies that invest in real estate or
interests therein);
10. Make loans to other persons (provided that for purposes of this
restriction, entering into repurchase agreements, acquiring corporate
debt securities and investing in U.S. Government obligations, short-
term commercial paper, certificates of deposit and bankers'
acceptances shall not be deemed to be the making of a loan);
11. Invest in commodities; commodity contracts other than foreign currency
forward contracts; or oil, gas and other mineral resource, lease, or
arbitrage transactions.
12. Write, purchase or sell options, puts, calls, straddles, spreads, or
combinations thereof.
13. 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);
14. Invest in warrants, valued at the lower of cost or market, to more
than 5% of the value of the Portfolio's net assets. Included within
that amount, but not to exceed 2% of the value of the Portfolio's net
assets, may be warrants that are not listed on the New York or
American Stock Exchange. Warrants acquired by the Portfolio in units
or attached to securities may be deemed to be without value;
15. Purchase more than 3% of the outstanding securities of any closed-end
investment company. (Any such purchase of securities issued by a
closed-end investment company will otherwise be made in full
compliance with Sections 12(d)(1)(a)(i), (ii) and (iii) of the
Investment Company Act of 1940 (the "1940 Act").
As a non-fundamental policy, the Portfolio will not invest in restricted
securities. This policy does not include restricted securities eligible for
resale to qualified institutional purchasers pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by SCMI pursuant to
guidelines adopted by the Schroder Core Board of Trustees the "Schroder Core
Board". Such guidelines take into account trading activity for such securities
and the availability of reliable pricing information, among other factors. If
there is a lack of trading interest in particular Rule 144A securities, these
securities may be illiquid.
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.
6
<PAGE>
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
RALPH E. HANSMANN (Honorary), 40 Wall Street, New York, New York - Honorary
Trustee of the Trust - Private investor; Director, First Eagle Fund of America,
Inc.; Director, Verde Exploration, Ltd.; Trustee Emeritus, Institute for
Advanced Study; Trustee and Treasurer, New York Public Library; Life Trustee,
Hamilton College.
JOHN I. HOWELL, Greenwich, Connecticut - 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, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust - retired since March, 1988; prior thereto, consultant
to SCMI since February 1, 1984.
MARK J. SMITH (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a 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 Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON (b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a 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.
CATHERINE S. WOOLEDGE, 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.
BARBARA GOTTLIEB (c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ (b) (c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
JOHN Y. KEFFER, Two Portland Square, Portland, Maine - Vice President of the
Trust. President of FFC, the Fund's transfer and dividend disbursing agent and
fund accountant and other affiliated entities including Forum Financial
Services, Inc. and Forum Advisors, Inc.
JANE P. LUCAS (c), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
7
<PAGE>
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 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.
THOMAS G. SHEEHAN, 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, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO (b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 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; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 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; 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.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) 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.
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive
an annual fee of $1,000 and a fee of $250 for each meeting of the Board of
Trustees (the "Trust 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 Fund has no bonus, profit sharing, pension or retirement plans.
8
<PAGE>
The following table provides the fees paid to each Trustee of the Trust for the
fiscal year ended October 31, 1996.
<TABLE>
<CAPTION>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrued Retirement From Trust And
As Part of Trust Fund Complex
Expenses Paid To Trustees
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $1,750
Mr. Hansmann 1,375 0 0 1,375
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 February 15, 1997 the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Fund's outstanding shares.
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 U.S. civil judgment against them. Civil remedies and criminal penalties
under U.S. federal securities laws may be unenforceable in the United Kingdom
Extradition treaties now in effect between the U.S. and the United Kingdom might
not subject such persons to effective enforcement of the criminal penalties of
such acts.
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 and SCMI. SCMI is a wholly owned U.S. subsidiary of Schroders
Incorporated, the wholly owned U.S. holding company 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 in eighteen
countries. The Schroder Group specializes in providing investment management
services, with funds under management currently in excess of $150 billion as of
December 31, 1996.
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 its 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
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 the 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 Schroder Core 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 interestholders
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 Trust, 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
9
<PAGE>
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 advisory services to the Portfolio, SCMI is entitled to a fee of
0.45% of the Fund's average daily net assets. For the fiscal years ended
October 31, 1994, 1995 and 1996, SCMI received advisory fees of $1,665,176,
$893,082 and $978,697 respectively.
The Fund currently invests all of its assets in the Portfolio. The Fund may
withdraw its investment from the Portfolio at any time if the Trust Board
determines that it is in the best interests of the Fund and its shareholders to
do so. Accordingly, the Trust retains SCMI as investment adviser to manage the
Fund's assets in the event the Fund so withdraws its investment. The investment
advisory agreement between the Trust and SCMI with respect to the Fund is the
same in all material respects as the Portfolio's Investment Advisory Agreement
(except as to the parties, the fee and the circumstances under which fees will
be paid, the jurisdiction whose laws govern the agreement and fees payable
thereunder). During a time that the Fund did not have substantially all of its
assets invested in the Portfolio or another investment company, for providing
investment advisory services under the investment advisory agreement for the
Fund, SCMI would be entitled to receive an advisory.fee of 0.50% of its average
daily net assets for the first $100 million of the Portfolio's net assets, 0.40%
of the next $150 million of average daily assets, and 0.35% of the Portfolio's
average daily net assets in excess of $250 million.
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 Securities and Exchange
Commission (and state securities commissions); and (iii) general supervision of
the operation of the Fund, including coordination 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.
During any period in which the Fund invests substantially all of its assets in
the Portfolio, for providing administrative services Schroder Advisors is
entitled to receive a fee from the Fund, payable monthly, at the annual rate of
0.15% of the Fund's average daily net assets. During any period in which the
Fund invests substantially all of its assets directly in securities, for
providing administrative services SCMI would be entitled to receive a monthly
fee from the Fund at the annual rate of 0.20% of the first $100 million of the
Fund's average daily net assets, 0.15% of the next $150 million, and 0.125% of
the assets in excess of $250 million. 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 0.05% 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,
Schroder Advisors and Forum provide similar services to the Portfolio for which
each is separately entitled to compensation at the annual rate of 0.075% 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 0.725% 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).
10
<PAGE>
For the fiscal years ended October 31, 1994, 1995 and 1996, Schroder Advisors
received administrative fees from the Fund and the Portfolio, as applicable, of
$832,588, $446,541, and $647,806 (after waivers of $113,230), respectively. The
Trust formerly had entered into an Administrative Services Contract with
Schroder Advisors that had substantially similar terms and provisions in all
material respects except as to the fees payable and the circumstances under
which the fees were paid. Specifically, Schroder Advisors was entitled to a
fee, payable monthly, at the annual rate of 0.25% of the first $100 million of
Fund's average daily net assets, 0.20% of the next $150 million, and 0.175% on
assets in excess of $250 million. For the period November 1, 1995 to October
31, 1996, the Fund had invested substantially all of its assets in the
Portfolio, and, accordingly, Schroder Advisors was entitled to a fee of only
0.20% and obligated to pay a fee to Forum Financial Services, Inc. ("FFSI") at
the rate of 0.05% for sub-administration services provided under the agreement
described below.
Under the former Sub-Administration Agreement among the Trust, SCMI, Schroder
Advisors, and FFSI, which had substantially similar terms and provisions in all
material respects to the current Subadministration Agreement for the Fund except
as to the fees payable and the circumstances under which the fees were paid,
payment for FFSI's services was made by Schroder Advisors and was not a separate
expense of the Fund.
Under former administration and subadministration agreements with Schroder Core,
Schroder Advisors and FFSI provided similar services to the Portfolio for which
Schroder Advisors was entitled to compensation at the annual rate of 0.15% of
the average daily net assets of the Portfolio and obligated to pay a fee to FFSI
of 0.075% for sub-administration services. The Portfolio's administration and
subadministration agreements were the same in all material respects as the
Fund's respective agreements (except as to the parties, the circumstances under
which fees were 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 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. The maximum annual amount
currently payable under the Plan is 0.25%, but 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. Salary expenses of sales staff
11
<PAGE>
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. During the fiscal years ended October 31, 1995 and 1996, the Fund
neither accrued nor paid any money under the Plan.
SERVICE ORGANIZATIONS
The Trust may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services for 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 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 will be a Service Organization
or receive fees for servicing. The Fund has no intention of making any such
payments to Service Organizations with respect to accounts of institutional
investors and, in any event, will make no such payments until the Trust Board
specifically so authorizes.
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
12
<PAGE>
the bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
PORTFOLIO ACCOUNTING
FFC, 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 FFC or by FFC upon 60 days' written
notice to the Trust.
Under the Accounting Agreement, FFC 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 Securities and Exchange Commission. For its services to
the fund, FFC receives from the Trust a fee of $36,000 per year plus, $12,000
per year for each class of the Fund above one,. FFC is paid an additional
$24,000 per year with respect to global and international funds. FFC is also
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.
FFC 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. FFC 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 FFC and its employees, agents, officers and directors against
and from any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and all other expenses arising out
of or in any way related to FFC's actions taken or failures to act with respect
to a Fund or based, if applicable, upon information, instructions or requests
with respect to a Fund given or made to FFC by an officer of the Trust duly
authorized. This indemnification does not apply to FFC's actions taken or
failures to act in cases of FFC's own bad faith, willful misconduct or gross
negligence.
FFC assumed responsibility for fund accounting on August 15, 1994. Previously,
these services were performed by SCMI. For the fiscal years ended October 31,
1994, 1995; and 1996, the Fund and Portfolio paid fund accounting fees of
$114,325, $72,000, and $86,000, respectively.
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 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 are charged to the Fund;
other expenses are allocated proportionately among all the series of the Trust
in relation to the net assets of each series.
PORTFOLIO TRANSACTIONS
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
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suitability for the particular client involved and a particular security may be
bought or sold for certain clients and 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 Contract authorizes and directs SCMI to place orders for
the purchase and sale of the Fund's 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 SCM 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 commission,
the timing of the transaction taking into account market prices and trends, the
reputation, experience and financial stability of the broker-dealers involved
and the quality of service rendered by the broker-dealers in other
transactions). For the years ended October 31, 1994, 1995, and 1996, the Fund
paid a total of $653,234; $584,429; and $756,181 respectively, in brokerage
commissions.
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 1934 Act, SCMI may cause the Fund to pay a
broker-dealer which provides with "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.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc. and subject to seeking the most favorable price and execution
available and such other policies as the Trustees may determine, SCMI may
consider sales of shares of the Fund as a factor in the selection of broker-
dealers to execute portfolio transactions for the Fund.
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<PAGE>
Subject to the general policies of the Portfolio regarding allocation of
portfolio brokerage as set forth above, the Schroder Core 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.
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-1 promulgated by
the Securities and Exchange Commission 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 11a2-2(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 11a2-2(T), Schroder Core 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, including a majority of
the non-interested Trustees.
The Fund has no understanding or arrangement to direct any specific portion of
its brokerage to Schroder Securities and will not direct brokerage to Schroder
Securities in recognition of research services. The Fund paid no commissions to
Schroder Securities in the Fund's fiscal years ended October 31, 1994, 1995 or
1996. For the fiscal year ended October 31, 1995, the Fund paid $1,829 in
brokerage commissions to Schroder, Munchmeyer, Hengst & Co., an affiliate of
Schroder Securities Limited, representing 0.003% of the Fund's aggregate
brokerage commissions and 0.005% of the Fund's aggregate dollar amount of
transactions involving the payment of commissions.
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 Fund's net assets by the total number of Fund shares
outstanding. 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.
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<PAGE>
The Schroder Core 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 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.
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
Under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund and
each other series established from time to time by the Trust Board is treated as
a separate taxpayer for federal income tax purposes with the result that: (i)
each such series must meet separately the income and distribution requirements
for qualification as a regulated investment company; and (ii) the amounts of
investment income and capital gain earned are determined on a series-by-series
(rather than on a Trust-wide) basis.
The Fund qualified for its last fiscal year as a regulated investment company
under Subchapter M of the Code and intends to so qualify each year so long as
such qualification is in the best interests of its shareholders. To do so the
Fund intends to distribute to shareholders at least 90% of its net investment
income (which includes dividends, interest and the excess of any net short-term
capital gain over net long-term capital loss), and to meet certain
diversification of assets, source of income, and other requirements of the Code.
The Fund will therefore not be subject to federal income tax on its net
investment income and net realized capital gain (the excess of net long-term
capital gain over net short-term capital loss) 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 this, 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 gain
or loss) for the calendar year; (ii) at
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least 98% of the excess of its capital gain over capital loss realized during
the one-year period ending October 31 of such year; and (iii) all such ordinary
income and capital gain 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 the calendar year in which the
distributions are received.
Under the Code, gain or loss attributable to fluctuations in foreign exchange
rates occur between the time the Fund accrues interest (or other receivable) or
accrues expenses (or other liabilities) and the time the Fund actually collects
such receivable or pays such liabilities are generally treated as ordinary
income or ordinary loss. Similarly, gain or loss 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 gain or loss from certain foreign
currency transactions and options on certain foreign currency transactions, are
generally treated as ordinary gain or loss. These gain or loss, referred to
under the Code as "Section 988" gain or loss, may increase or decrease the
amount of the Fund's net investment income to be distributed to its shareholders
as ordinary income.
Generally, the hedging transactions undertaken by the Fund may be deemed to be
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gain (or loss) 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.
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 which
are applicable to straddles. If the Fund makes any of the elections, the
amount, character and timing of the recognition of gain or loss 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 gain or loss from the affected
straddle positions.
Because application of the straddle rules may affect the character of gain or
loss, defer loss and/or accelerate the recognition of gain or loss from the
affected straddle positions, the amount that must be distributed to shareholders
(and which will be taxed to shareholders as ordinary income or long-term capital
gain) may be different from 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 to shareholders are taxable whether reinvested in additional
shares or received in cash. Shareholders that reinvest distributions will have
for federal income tax purposes a cost basis in each share received
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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. If a
distribution reduces the net asset value below a shareholder's cost basis, such
distribution nevertheless is 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 which will be returned to the investor in the form
of a taxable distribution.
Upon redemption or sale of shares, a shareholder will realize a taxable gain or
which 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.
The Fund intends to minimize foreign income and withholding taxes by investing
in obligations whose payments 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) 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 the shareholder, as the shareholder's pro rata portion of
income taxes paid to or withheld by foreign governments with respect to
interest, dividends and gain on the Fund's foreign portfolio investments.
Shareholders then may take the amount of such foreign taxes paid or withheld as
a credit against their federal income tax, subject to certain limitations.
Shareholders find it more to their advantage to do so, they may, in the
alternative, deduct the foreign tax withheld as an itemized deduction in
computing taxable income. Shareholders are referred to their tax advisors
regarding to the availability of the foreign tax credit.
The Trust is 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 shareholder). 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 properly 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
they are 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 advisors 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 series, each having
different investment objectives 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
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Trust was reorganized as a Delaware business trust. At that time, the Trust's
name was changed to its present name. The Trust is registered as an open-end
management investment company under the 1940 Act.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. 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.
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.
Shares of the Fund are fully paid and 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
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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.
PRINCIPAL SHAREHOLDERS
As of February 24 1997, the following persons owned (of record or beneficially)
5% or more of the Fund's shares:
SHAREHOLDER SHARE BALANCE PERCENT OF FUND
- ----------- ------------- ---------------
Boat & Co 1,117,877.976 10.78%
PO Box 14737
St Louis, MO 63718
Union College Pooled Endowment Funds 756,135.770 7.29%
P.O. Box 3199, Church Street Station
New York, NY 10008
MAC & CO 962,339.663 9.28%
Mellon Bank, N.A.
MPNF 5044422
P.O. Box 320
Pittsburgh, PA 15230-3198
MAC & CO 796,894.162 7.68%
Mellon Bank, N.A.
IWHF5042882
P.O. Box 320
Pittsburgh, PA 15230-3198
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of its average annual total
return in advertisement or reports to shareholders or prospective investors.
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:
n
P(1+T) =ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n= the number of years, and ERV = 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.
For the one year, five year and ten year periods ended October 31, 1996, the
average annual total return of the Fund was 2.08%, 8.56% and 12.51%,
respectively.
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 which may be expected in the
future.
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
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indexes which 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, N.A., 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. Pursuant to rules adopted under the 1940 Act, the Fund 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 following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to perform capably custodial
services for the Fund; the reputation of the institution in its national market;
the political and economic stability of the country in which the institution is
located; and further risks of potential nationalization or expropriation of
Portfolio assets.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp., Portland, Maine, serves as the Fund's transfer agent and
dividend disbursing agent.
LEGAL COUNSEL
Jacobs Persinger & Parker, 77 Water Street, New York, New York 10005, counsel
to the Fund, passes upon certain legal matters in connection with the shares
offered by the Fund.
INDEPENDENT ACCOUNTANTS
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. Securities and Exchange Commission filings. Their 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 Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus 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.
21
<PAGE>
FINANCIAL STATEMENTS
The audited Statement of Assets and Liabilities, Statement of Operations,
Statements of Changes in Net Assets, Statement of Investments, notes thereto,
and Financial Highlights of the Fund for the fiscal year ended October 31, 1996
and the Report of Independent Accountants thereon (included in the Annual Report
to shareholders), which are delivered along with this SAI, are incorporated
herein by reference.
22
<PAGE>
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 & 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.
A-1
<PAGE>
"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.
A-2
<PAGE>
SCHRODER U.S. SMALLER COMPANIES FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997, AS AMENDED APRIL 15, 1997
- --------------------------------------------------------------------------------
[MAP]
INVESTMENT ADVISER
Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUBADMINISTRATOR
Forum Administrative Services, Limited Liability Company ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder U.S. Smaller Companies 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 herein). Advisor Shares
incur more 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 Prospectus dated March 1, 1997, as amended 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
printed above.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . 3
U.S. Government Securities . . . . . . . . . . . . . . . . 3
Bank Obligations . . . . . . . . . . . . . . . . . . . . . 3
Short-Term Debt Securities . . . . . . . . . . . . . . . . 3
Repurchase Agreements. . . . . . . . . . . . . . . . . . . 4
High Yield/Junk Bonds . . . . . . . . . . . . . . . . . . 4
Illiquid and Restricted Securities . . . . . . . . . . . . 5
Loans of Portfolio Securities. . . . . . . . . . . . . . . 5
Covered Calls and Hedging. . . . . . . . . . . . . . . . . 5
Short Sales Against-the-Box. . . . . . . . . . . . . . . . 9
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . 9
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . 10
Officers and Trustees. . . . . . . . . . . . . . . . . . . 10
Investment Adviser . . . . . . . . . . . . . . . . . . . . 12
Administrative Services. . . . . . . . . . . . . . . . . . 13
Distribution of Fund Shares. . . . . . . . . . . . . . . . 14
Service Organizations. . . . . . . . . . . . . . . . . . . 15
Portfolio Accounting . . . . . . . . . . . . . . . . . . . 16
Fees and Expenses. . . . . . . . . . . . . . . . . . . . . 16
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . 17
Investment Decisions . . . . . . . . . . . . . . . . . . . 17
Brokerage and Research Services. . . . . . . . . . . . . . 17
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . 18
Determination of Net Asset Value Per Share . . . . . . . . 18
Redemption In-Kind . . . . . . . . . . . . . . . . . . . . 19
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . 19
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 20
Organization . . . . . . . . . . . . . . . . . . . . . . . 20
Capitalization and Voting. . . . . . . . . . . . . . . . . 21
Principal Shareholders . . . . . . . . . . . . . . . . . . 22
Performance Information. . . . . . . . . . . . . . . . . . 22
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . 23
Transfer Agent and Dividend Disbursing Agent . . . . . . . 23
Legal Counsel. . . . . . . . . . . . . . . . . . . . . . . 23
Independent Accountants. . . . . . . . . . . . . . . . . . 23
Registration Statement . . . . . . . . . . . . . . . . . . 23
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . 23
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . A-1
2
<PAGE>
INTRODUCTION
Schroder U.S. Smaller Companies Fund (the "Fund") is a diversified, separately
managed series of Schroder Capital Funds (Delaware) (the "Trust"), an open-end
management investment company currently consisting of five separate series, each
of which has different investment objectives and policies.
The Fund's investment objective is to seek capital appreciations by investing
primarily in equity securities of companies domiciled in the U.S. that have
market capitalizations, at the time of purchase of $1.5 billion or less. There
can be no assurance that the Fund's investment objective will be achieved.
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 as identified
in "Investment Objective" and "Investment Policies" in the Prospectus. The
following information supplements the discussion found in those sections by
providing additional information or elaborating upon the discussion with respect
to certain of those securities and techniques.
U.S. GOVERNMENT SECURITIES
The Fund may invest in obligations issued or guaranteed by the U.S. Government
(or its agencies, instrumentalities or government-sponsored enterprises) that
have remaining maturities not exceeding one year. Agencies, instrumentalities
and government-sponsored enterprises that issue or guarantee debt securities
have been established or sponsored by the U.S. Government and 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 United States
Treasury and the Government National Mortgage Association. 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 Fund may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) whose total assets at the time of purchase in
exceed $1 billion. Such banks must be members of the Federal Deposit Insurance
Corporation.
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
The Fund may invest in commercial paper -- short-term unsecured promissory notes
issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund for temporary defensive
purposes consists of direct obligations of domestic issuers that at the time of
investment are rated "P-1" by Moody's Investors Service ("Moody's") or "A-1" by
Standard & Poor's ("S&P"), or securities which, if not rated, are issued by
companies having an outstanding debt issue currently rated "Aaa" or "Aa" by
Moody's or "AAA" or "AA" by S&P. The rating "P-1" is the highest commercial
paper rating assigned by Moody's and the rating "A-1" is the highest commercial
paper rating assigned by S&P.
3
<PAGE>
REPURCHASE AGREEMENTS
The Fund may invest in securities subject to repurchase agreements that mature
in seven days or less with U.S. banks or broker- dealers. In a typical
repurchase agreement the seller of a security commits itself at the time of the
sale to repurchase that security from the buyer at a mutually agreed-upon time
and price. The repurchase price exceeds the sale price, reflecting an agreed-
upon interest rate effective for the period the buyer owns the security subject
to repurchase. The agreed-upon rate is unrelated to the interest rate on that
security. SCMI will monitor the value of the underlying security at the time
the transaction is entered into and at all times during the term of the
repurchase agreement to insure that the value of the security always equals or
exceeds the repurchase price. If a seller defaults under a repurchase
agreement, the Fund may have difficulty exercising its rights to the underlying
securities and may incur costs and experience time delays in connection with the
disposition of such securities. To evaluate potential risks, SCMI reviews the
credit-worthiness of banks and dealers with which the Fund enters into
repurchase agreements.
HIGH YIELD/JUNK BONDS
The Fund may invest up to 5% of its assets in bonds rated below "Baa" by Moody's
or "BBB" by S&P (commonly known as "high yield/high risk securities" or "junk
bonds"). Securities rated lower than "Baa" by Moody's or "BBB" by S&P are
classified as non-investment grade securities and are considered speculative.
Junk bonds may be issued as a consequence of corporate restructurings (such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events) or by smaller or highly leveraged companies. Although the growth of the
high yield securities market in the 1980's paralleled a long economic expansion,
recently many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on: (i) the high yield bond
market; (ii) the value of high yield securities; and (iii) the ability of the
securities' issuers to service their principal and interest payment obligations,
to meet their projected business goal, or to obtain additional financing. In
addition, the market for high yield securities, which is concentrated in
relatively few market makers, may not be as liquid as the market for investment
grade securities. Under adverse market or economic conditions, the market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the Fund
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value.
In periods of reduced market liquidity, junk bond prices may become more
volatile and may experience sudden and substantial price declines. Also, there
may be significant disparities in the prices quoted for junk bonds by various
dealers. Under such conditions, a Fund may have to use subjective rather than
objective criteria to value its junk bond investments accurately and rely more
heavily on the judgment of the Fund's investment adviser.
Prices for junk bonds also may be affected by legislative and regulatory
developments. For example, new federal laws require the divestiture by
federally insured savings and loans associations of their investments in high
yield bonds. Also, from time to time, Congress has considered legislation to
restrict or eliminate the corporate tax deduction for interest payments or to
regulate corporate restructurings such as takeovers, mergers or leveraged
buyouts. These laws could adversely affect the Fund's net asset value and
investment practices, the market for high yield securities, the financial
condition of issuers of these securities, and the value of outstanding high
yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
4
<PAGE>
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Investment Policies" in the
Prospectus sets forth the circumstances in which the Fund may invest in
"restricted securities". In connection with the Fund's original purchase of
restricted securities it may negotiate rights with the issuer to have such
securities registered for sale at a later time. Further, the registration
expenses of illiquid restricted securities may also be negotiated by the Fund
with the issuer at the time such securities are purchased by the Fund. When
registration is required, however, a considerable period may elapse between the
decision to sell the securities and the time the Fund would be permitted to sell
such securities. A similar delay might be experienced in attempting to sell
such securities pursuant to an exemption from registration. Thus, the Fund may
not be able to obtain as favorable a price as that prevailing at the time of the
decision to sell.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities subject to the restrictions stated in
the Prospectus. Under applicable regulatory requirements (which are subject to
change), the loan collateral must: (i) on each business day, at least equal the
market value of the loaned securities; and (ii) must consist of cash, bank
letters of credit, U.S. Government securities, or other cash equivalents in
which the Fund is permitted to invest. To be acceptable as collateral, letters
of credit must obligate a bank to pay amounts demanded by the Fund if the demand
meets the terms of the letter. Such terms and the issuing bank must be
satisfactory to the Fund. When lending portfolio securities, the Fund receives
from the borrower an amount equal to the interest paid or the dividends declared
on the loaned securities during the term of the loan plus the interest on the
collateral securities.(less any finders' or administrative fees the Fund pays in
arranging the loan). The Fund may share the interest it receives on the
collateral securities with the borrower as long as it realizes at least a
minimum amount of interest required by the lending guidelines established by the
Trust's Board of Trustees (the "Trust Board"). The Fund will not lend its
portfolio securities to any officer, director, employee or affiliate of the Fund
or SCMI. The terms of the Fund's loans must meet certain tests under the
Internal Revenue Code and permit the Fund to reacquire loaned securities on five
business days' notice or in time to vote on any important matter.
COVERED CALLS AND HEDGING
As described in the Prospectus, the Fund may write covered calls on up to 100%
of its total assets or employ one or more types of Hedging Instruments. When
hedging to attempt to protect against declines in the market value of the Fund's
portfolio, to permit the Fund to retain unrealized gain in the value of
portfolio securities which have appreciated, or to facilitate selling securities
for investment reasons, the Fund may: (i) sell Stock Index Futures;
(ii) purchase puts on such Futures or securities; or (iii) write covered calls
on securities or on Stock Index Futures. When hedging to establish a position
in the equities markets as a temporary substitute for purchasing particular
equity securities (which the Fund will normally purchase and then terminate the
hedging position), the Fund may: (i) purchase Stock Index Futures; or
(ii) purchase calls on such Futures or on securities. The Fund's strategy of
hedging with Stock Index Futures and options on such Futures will be incidental
to the Fund's activities in the underlying cash market.
WRITING COVERED CALL OPTIONS. The Fund may write (i.e., sell) call options
("calls") if: (i) the calls are listed on a domestic securities or commodities
exchange; and (ii) the calls are "covered" (I.E., the Fund owns the securities
subject to the call or other securities acceptable for applicable escrow
arrangements) while the call is outstanding. A call written on a Stock Index
Future must be covered by deliverable securities or segregated liquid assets.
If a call written by the Fund is exercised, the Fund forgoes any profit from any
increase in the market price above the call price of the underlying investment
on which the call was written.
When the Fund writes a call on a security, it receives a premium and agrees to
sell the underlying securities to a purchaser of a corresponding call on the
same security during the call period (usually not more than nine months) at a
fixed exercise price (which may differ from the market price of the underlying
security), regardless of market price changes during the call period. The risk
of loss will have been retained by the Fund if the price of the underlying
security should decline during the call period, which may be offset to some
extent by the premium.
5
<PAGE>
To terminate its obligation on a call it has written, the Fund may purchase a
corresponding call in a "closing purchase transaction". A profit or loss will
be realized, depending upon whether the net of the amount of option transaction
costs and the premium previously received on the call written was more or less
than the price of the call subsequently purchased. A profit may also be
realized if the call lapses unexercised, because the Fund retains the underlying
security and the premium received. Any such profits are considered short-term
capital gain for federal income tax purposes, and when distributed by the Fund
are taxable as ordinary income. If the Fund could not effect a closing purchase
transaction due to the lack of a market, it would have to hold the callable
securities until the call lapsed or was exercised.
The Fund may also write calls on Stock Index Futures without owning a futures
contract or a deliverable bond, provided that at the time the call is written,
the Fund covers the call by segregating in escrow an equivalent dollar amount of
liquid assets. The fund will segregate additional liquid assets if the value of
the escrowed assets drops below 100% of the current value of the Stock Index
Future. In no circumstances would an exercise notice require the Fund to
deliver a futures contract; it would simply put the Fund in a short futures
position, which is permitted by the Fund's hedging policies.
PURCHASING CALLS AND PUTS. The Fund may purchase put options ("puts") that
relate to: (i) securities it holds; (ii) Stock Index Futures (whether or not it
holds such Stock Index Futures in its portfolio); or (iii) broadly-based stock
indices. The Fund may not sell puts other than those it previously purchased,
nor purchase puts on securities it does not hold. The fund may purchase calls:
(i) as to securities, broadly-based stock indices or Stock Index Futures; or
(ii) to effect a "closing purchase transaction" to terminate its obligation on a
call it has previously written. A call or put may be purchased only if, after
such purchase, the value of all put and call options held by the Fund would not
exceed 5% of the Fund's total assets.
When the Fund purchases a call (other than in a closing purchase transaction),
it pays a premium and, except as to calls on stock indices, has the right to buy
the underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price. The Fund benefits
only if the call is sold at a profit or if, during the call period, the market
price of the underlying investment is above the sum of the call price plus the
transaction costs and the premium paid for the call and the call is exercised.
If the call is not exercised or sold (whether or not at a profit), it will
become worthless at its expiration date and the Fund will lose its premium
payments and the right to purchase the underlying investment. When the Fund
purchases a call on a stock index, it pays a premium, but settlement is in cash
rather than by delivery of an underlying investment.
When the Fund purchases a put, it pays a premium and, except as to puts on stock
indices, has the right to sell the underlying investment to a seller of a
corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on a security or Stock Index Future the Fund owns
enables the Fund to attempt to protect itself during the put period against a
decline below the exercise price in the value of the underlying investment by
selling the underlying investment at the exercise price to a seller of a
corresponding put. If the market price of the underlying investment is equal to
or exceeds the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration date and the Fund will
lose its premium payment and the right to sell the underlying investment; the
put may, however, be sold prior to expiration (whether or not at a profit).
Purchasing a put on either a stock index or on a Stock Index Future not held by
the Fund permits the Fund either to resell the put or to buy the underlying
investment and sell it at the exercise price. The resale price of the put will
vary inversely with the price of the underlying investment. If the market price
of the underlying investment is above the exercise price and, as a result, the
put is not exercised, the put will become worthless on its expiration date. In
the event of a decline in price of the underlying investment, the Fund could
exercise or sell the put at a profit to attempt to offset some or all of its
loss on its portfolio securities. When the Fund purchases a put on a stock
index, or on a Stock Index Future not held by it, the put protects the Fund to
the extent that the index moves in a similar pattern to the securities held. In
the case of a put on a stock index or Stock Index Future, settlement is in cash
rather than by the Fund's delivery of the underlying investment.
6
<PAGE>
STOCK INDEX FUTURES. The Fund may buy and sell futures contracts only if they
relate to broadly-based stock indices ("Stock Index Futures"). A stock index is
"broadly-based" if it includes stocks that are not limited to issuers in any
particular industry or group of industries. Stock Index Futures obligate the
seller to deliver (and the purchaser to take) cash to settle the futures
transaction, or to enter into an offsetting contract. No physical delivery of
the underlying stocks in the index is made.
No price is paid or received upon the purchase or sale of a Stock Index Future.
Upon entering into a Futures transaction, the Fund will be required to deposit
an initial margin payment in cash or U.S. Treasury bills with a futures
commission merchant (the "futures broker"). The initial margin will be
deposited with the Fund's Custodian in an account registered in the futures
broker's name; the futures broker can gain access to that account only under
specified conditions. As the Future is marked-to-market to reflect changes in
its market value, subsequent margin payments (called variation margin) will be
paid to or by the futures broker on a daily basis. Prior to expiration of the
Future, if the Fund elects to close out its position by taking an opposite
position, a final determination of variation margin is made, additional cash is
required to be paid by or released to the Fund, and any loss or gain is realized
for tax purposes. Although Stock Index Futures by their terms call for
settlement by the delivery of cash, in most cases the obligation is fulfilled
without such delivery, by entering into an offsetting transaction. All futures
transactions are effected through a clearinghouse associated with the exchange
on which the contracts are traded.
Puts and calls on broadly-based stock indices or Stock Index Futures are similar
to puts and calls on securities or futures contracts except that all settlements
are in cash and gain or loss depends on changes in the index in question (and
thus on price movements in the stock market generally) rather than on price
movements in individual securities or futures contracts. When the Fund buys a
call on a stock index or Stock Index Future, it pays a premium. During the call
period, upon exercise of a call by the Fund, a seller of a corresponding call on
the same index will pay the Fund an amount of cash to settle the call if the
closing level of the stock index or Stock Index Future upon which the call is
based is greater than the exercise price of the call; that cash payment is equal
to the difference between the closing price of the index and the exercise price
of the call times a specified multiple (the "multiplier") which determines the
total dollar value for each point of difference. When the Fund buys a put on a
stock index or Stock Index Future, it pays a premium and has the right during
the put period to require a seller of a corresponding put, upon the Fund's
exercise of its put, to deliver to the Fund an amount of cash to settle the put
if the closing level of the stock index or Stock Index Future upon which the put
is based is less than the exercise price of the put; that cash payment is
determined by the multiplier, in the same manner as described above as to calls.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE. The Fund's
Custodian, or a securities depository acting for the Custodian, will act as the
Fund's escrow agent, through the facilities of the Options Clearing Corporation
("OCC"), as to the securities on which the Fund has written options (or as to
other acceptable escrow securities) so that no margin will be required for such
transactions. OCC will release the securities on the expiration of the option
or upon the Fund's entering into a closing transaction. An option position may
be closed out only on a market that provides secondary trading for options of
the same series, and there is no assurance that a liquid secondary market will
exist for any particular option.
The Fund's option activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by the Fund may cause the
Fund to sell related portfolio securities, thus increasing its turnover rate in
a manner beyond the Fund's control. The exercise by the Fund of puts on
securities or Stock Index Futures may cause the sale of related investments,
also increasing portfolio turnover. Although such exercise is within the Fund's
control, holding a put might cause the Fund to sell the underlying investment
for reasons that would not exist in the absence of the put. The Fund will pay a
brokerage commission each time it buys or sells a call, a put or an underlying
investment in connection with the exercise of a put or call. Such commissions
may be higher than those which would apply to direct purchases or sales of the
underlying investments. Premiums paid for options are small in relation to the
market value of such investments and consequently, put and call options offer
large amounts of leverage. The leverage offered by trading in options could
result in the Fund's net asset value being more sensitive to changes in the
value of the underlying investment.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS AND COVERED CALLS. The Fund must
operate within certain restrictions as to its long and short positions in Stock
Index Futures and options thereon under a rule (the "CFTC
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<PAGE>
Rule") adopted by the Commodity Futures Trading Commission (the "CFTC") under
the Commodity Exchange Act (the "CEA"), which excludes the Fund from
registration with the CFTC as a "commodity pool operator" (as defined in the
CEA) if it complies with the CFTC Rule. Under these restrictions the Fund will
not, as to any positions, whether short, long or a combination thereof, enter
into Stock Index Futures and options thereon for which the aggregate initial
margins and premiums exceed 5% of the fair market value of its total assets,
with certain exclusions as defined in the CFTC Rule. Under the restrictions,
the Fund also must, as to its short positions, use Stock Index Futures and
options thereon solely for bona-fide hedging purposes within the meaning and
intent of the applicable provisions under the CEA.
Transactions in options by the Fund are subject to limitations established by
each of the exchanges governing the maximum number of options that may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by other entities (including
other investment companies having the same or an affiliated investment adviser).
Position limits also apply to Stock Index Futures. An exchange may order the
liquidation of positions found to be in violation of those limits and may impose
certain other sanctions. Due to requirements under the Investment Company Act
of 1940 (the "1940 Act"), when the Fund purchases a Stock Index Future, the Fund
will maintain, in a segregated account or accounts with its custodian bank, cash
or readily-marketable, short-term (maturing in one year or less) debt
instruments in an amount equal to the market value of the securities underlying
such Stock Index Future, less the margin deposit applicable to it.
TAX ASPECTS OF HEDGING INSTRUMENTS. The Fund intends to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986 (the "Code"). One
of the tests for such qualification is that less than 30% of its gross income
must be derived from gain realized on the sale of securities held for less than
three months. Due to this limitation, the Fund will limit the extent to which
it engages in the following activities, but will not be precluded from them: (i)
selling investments, including Stock Index Futures, held for less than three
months, whether or not they were purchased on the exercise of a call held by the
Fund; (ii) purchasing calls or puts that expire in less than three months; (iii)
effecting closing transactions with respect to calls or puts purchased less than
three months previously; (iv) exercising puts held by the Fund for less than
three months; and (v) writing calls on investments held for less than three
months.
POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks discussed above,
there is a risk in using short hedging by selling Stock Index Futures or
purchasing puts on stock indices that the prices of the applicable index (thus
the prices of the Hedging Instruments) will correlate imperfectly with the
behavior of the cash (I.E., market value) prices of the Fund's equity
securities. The ordinary spreads between prices in the cash and futures markets
are subject to distortions due to differences in the natures of those markets.
First, all participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures markets could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the futures markets may
cause temporary price distortions.
The risk of imperfect correlation increases as the composition of the Fund's
portfolio diverges from the securities included in the applicable index. To
compensate for the imperfect correlation of movements in the price of the equity
securities being hedged and movements in the price of the Hedging Instruments,
the Fund may use Hedging Instruments in a greater dollar amount than the dollar
amount of equity securities being hedged if the historical volatility of the
prices of such equity securities being hedged is more than the historical
volatility of the applicable index. It is also possible that where the Fund has
used Hedging Instruments in a short hedge, the market may advance and the value
of equity securities held in the Fund's portfolio may decline. If this
occurred, the Fund would lose money on the Hedging Instruments and also
experience a decline in value in its equity securities. However, while this
could occur for a very brief period or to a very small degree, the value of a
diversified portfolio
8
<PAGE>
of equity securities will tend to move over time in the same direction as the
indices upon which the Hedging Instruments are based.
If the Fund uses Hedging Instruments to establish a position in the equities
markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying Stock Index Futures and/or calls on such
Futures, on securities or on stock indices, it is possible that the market may
decline; if the Fund then concludes not to invest in equity securities at that
time because of concerns as to possible further market decline or for other
reasons, the Fund will realize a loss on the Hedging Instruments that is not
offset by a reduction in the price of the equity securities purchased.
SHORT SALES AGAINST-THE-BOX
After the Fund makes a short sale against-the-box, while the short position is
open, the Fund must own an equal amount of the securities sold short; or by
virtue of ownership of securities have the right, without payment of further
consideration, to obtain an equal amount of the securities sold short. Short
sales against-the-box may be made to defer, for federal income tax purposes,
recognition of gain or loss on the sale of securities "in the box" until the
short position is closed out.
INVESTMENT RESTRICTIONS
The Fund's significant investment restrictions are described in the Prospectus.
The following investment restrictions, except where stated to be non-fundamental
policies, are also fundamental policies of the Fund and, together with the
fundamental policies and investment objective described in the Prospectus,
cannot be changed without the vote of a "majority" of the Fund's outstanding
shares. Under the 1940 Act, such a "majority" vote is defined as the vote of
the holders of the lesser of: (i) 67% or more of the shares present or
represented by proxy at a meeting of shareholders, if the holders of more than
50% of the outstanding shares are present; or (ii) more than 50% of the
outstanding shares. Under these additional restrictions, the Fund cannot:
1. Underwrite securities of other companies (except insofar as the Fund
might be deemed to be an underwriter in the resale of any securities
held in its portfolio);
2. Invest in commodities or commodity contracts (other than Hedging
Instruments, which it may use as permitted by any of its other
fundamental policies, whether or not any such Hedging Instrument is
considered to be a commodity or a commodity contract);
3. Purchase securities on margin; however, the Fund may make margin
deposits in connection with any Hedging Instruments, which it may use
as permitted by any of its other fundamental policies;
4. Purchase or write puts or calls except as permitted by any of its
other fundamental policies;
5. Lend money except in connection with the acquisition of that portion
of publicly-distributed debt securities which the Fund's investment
policies and restrictions permit it to purchase (see "Investment
Objective" and "Investment Policies" in the Prospectus); the Portfolio
may also make loans of portfolio securities (see "Loans of Portfolio
Securities") and enter into repurchase agreements (see "Repurchase
Agreements");
6. Pledge, mortgage or hypothecate its assets to an extent greater than
10% of the value of the total assets of the Fund; however, this does
not prohibit the escrow arrangements contemplated by the put and call
activities of the Fund or other collateral or margin arrangements in
connection with any of the Hedging Instruments, which it may use as
permitted by any of its other fundamental policies;
9
<PAGE>
7. Invest in companies for the purpose of acquiring control or management
thereof;
8. Invest in interests in oil, gas or other mineral exploration or
development programs (but may purchase readily marketable securities
of companies which operate, invest in, or sponsor such programs); or
9. Invest in real estate or in interests in real estate, but may purchase
readily marketable securities of companies holding real estate or
interests therein.
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. Each of these individuals currently serves
in the same capacity for Schroder Core.
PETER E. GUERNSEY, Oyster Bay, New York - Trustee of the Trust - Insurance
Consultant since August 1986; prior thereto Senior Vice President, Marsh &
McLennan, Inc., insurance brokers.
RALPH E. HANSMANN (Honorary), 40 Wall Street, New York, New York - Honorary
Trustee of the Trust - Private investor; Director, First Eagle Fund of America,
Inc.; Director, Verde Exploration, Ltd.; Trustee Emeritus, Institute for
Advanced Study; Trustee and Treasurer, New York Public Library; Life Trustee,
Hamilton College.
JOHN I. HOWELL, Greenwich, Connecticut - 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, 44 East 64th Street, New York, New York - Trustee of the
Trust - Chairman of the Board of Directors, Josiah Macy, Jr. Foundation
(charitable foundation).
HERMANN C. SCHWAB, 787 Seventh Avenue, New York, New York - Chairman (Honorary)
and Trustee of the Trust - retired since March, 1988; prior thereto, consultant
to SCMI since February 1, 1984.
MARK J. SMITH (b), 33 Gutter Lane, London, England - President and Trustee of
the Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, 787 Seventh Avenue, New York, New York - a 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 Schroders plc in various positions in the
investment research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON (b) (c), 787 Seventh Avenue, New York, New York -
Vice President of the Trust - Secretary of SCM since July 1995; Secretary of
Schroder Advisors since April 1990; First Vice President and General Counsel of
Schroders Incorporated(b) since May 1987; prior thereto, partner of Sullivan &
Worcester, a law firm.
RICHARD R. FOULKES, 787 Seventh Avenue, New York, New York - a 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.
CATHERINE S. WOOLEDGE, 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
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<PAGE>
Resources, Inc. from September 1993 to September 1994, and prior thereto
associate at Drinker Biddle & Reath, Philadelphia, PA.
BARBARA GOTTLIEB (c), 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995 prior
thereto held various positions with SWIS affiliates.
ROBERT JACKOWITZ (b) (c), 787 Seventh Avenue, New York, New York - Treasurer of
the Trust - Vice President of SCM since September 1995; Treasurer of SCM and
Schroder Advisors since July 1995; Vice President of SCMI since June 1995; and
Assistant Treasurer of Schroders Incorporated since January 1993.
JOHN Y. KEFFER, Two Portland Square, Portland, Maine - Vice President of the
Trust. President of FFC, the Fund's transfer and dividend disbursing agent and
fund accountant and other affiliated entities including Forum Financial
Services, Inc. and Forum Advisors, Inc.
JANE P. LUCAS (c), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Director and Senior Vice President SCMI; Director of SCM since
September 1995; Assistant Director Schroder Investment Management Ltd. since
June 1991.
GERARDO MACHADO, 787 Seventh Avenue, New York, New York - Assistant Secretary of
the Trust - Associate, SCMI.
CATHERINE A. MAZZA, 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.
THOMAS G. SHEEHAN, 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, 787 Seventh Avenue, New York, New York - Vice President of the
Trust - First Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987.
JOHN A. TROIANO (b), 787 Seventh Avenue, New York, New York - Vice President of
the Trust - Managing Director and Senior Vice President of SCMI since October
1995; Director of Schroder Advisors since October 1992; Director of SCMI since
1991; prior thereto, employed by various affiliates of SCMI in various positions
in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 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; prior to July, 1990, employed by various financial
institutions as a securities or financial analyst.
ALEXANDRA POE, 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; 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.
MARY KUNKEMUELLER, 787 Seventh Avenue, New York, New York - Assistant Secretary
of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act.
(b) 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.
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<PAGE>
(c) Schroder Capital Management, Inc. ("SCM") is a wholly owned subsidiary of
Schroder Wertheim Holdings Incorporated, which is a wholly owned subsidiary
of Schroders, Incorporated, which in turn is an indirect wholly owned U.S.
subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust receive no salary,
fees or compensation from the Fund. Independent Trustees of the Trust receive
an annual fee of $1,000 and a fee of $250 for each meeting of the Trust 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 Fund 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>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation Retirement Benefits Upon Compensation
From Trust Benefits Accrued Retirement From Trust And
As Part of Trust Fund Complex
Expenses Paid To Trustees
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mr. Guernsey $1,750 $0 $0 $1,750
Mr. Hansmann 1,375 0 0 1,375
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 February 15, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Fund's outstanding shares.
While 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
U.S. civil judgments against them. Civil remedies and criminal penalties under
U.S. federal securities law may be unenforceable in the United Kingdom
Extradition treaties now in effect between the U.S. and the United Kingdom might
not subject such persons to effective enforcement of the criminal penalties of
such acts.
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
and SCMI. SCMI is a wholly owned U.S. subsidiary of Schroders Incorporated, the
wholly owned U.S. holding company 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 in eighteen countries. The
Schroder Group specializes in providing investment management services, with
funds under management currently in excess of $150 billion as of December 31,
1996.
Under the Investment Advisory Agreement, SCMI manages the investment and
reinvestment of the Portfolio's assets and continuously reviews, supervises and
administers its 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 selected by
it in its discretion. SCMI also furnishes to Schroder Core 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 the Fund.
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<PAGE>
Under the terms of the Investment Advisory Agreement, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
inside information that may be in its possession or in the possession of its
affiliates.
The Investment Advisory Agreement continues in effect provided such continuance
is approved annually: (i) by the holders of a majority of the outstanding
voting securities of the Portfolio or by Schroder Core 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 interestholders 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 Trust, 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 advisory services to the Portfolio, SCMI is entitled to a fee of
0.50% of its average daily net assets for the first $100 million of the
Portfolio's net assets, 0.40% of the next $150 million of average daily assets,
and 0.35% of the Portfolio's average daily net assets in excess of $250 million.
For the fiscal years ended October 31, 1994, 1995 and 1996, SCMI received
advisory fees of $63,210, $71,188 and $60,283, (after waivers of $16,090),
respectively.
The Fund currently invests all of its assets in the Portfolio. The Fund may
withdraw its investment from the Portfolio at any time if the Trust Board
determines that it is in the best interests of the Fund and its shareholders to
do so. Accordingly, the Trust retains SCMI as investment adviser to manage the
Fund's assets in the event the Fund so withdraws its investment. The investment
advisory agreement between the Trust and SCMI with respect to the Fund is the
same in all material respects as the Portfolio's Investment Advisory Agreement
(except as to the parties, the fee and the circumstances under which fees will
be paid, the jurisdiction whose laws govern the agreement and fees payable
thereunder). During a time that the Fund did not have substantially all of its
assets invested in the Portfolio or another investment company, for providing
investment advisory services under the investment advisory agreement for the
Fund, SCMI would be entitled to receive an advisory fee of 0.60% of the Fund's
average daily net assets.
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 Securities and Exchange
Commission and state securities commissions; and (iii) general supervision of
the operation of the Fund, including coordination 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.
During any period in which the Fund invests substantially all of its assets in
the Portfolio, for providing administrative services Schroder Advisors is
entitled to receive from the Fund a fee, payable monthly, at the annual rate of
0.25% of the Fund's average daily net assets. During any period in which the
Fund invests substantially all of its assets directly in securities, for
providing administrative services SCMI would be entitled to receive a monthly
fee from the Fund at the annual rate of 0.15% 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
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<PAGE>
shareholder reporting and regulatory compliance. During any period in which the
Fund invests substantially all of its assets in the Portfolio, for providing
subadministrative services Forum is entitled to a fee at the annual rate of
0.05% of the Fund's average daily net assets. During any period in which the
Fund invests substantially all of its assets directly in securities, for
providing administrative services Forum would be entitled to receive a monthly
fee from the Fund at the annual rate of 0.10% of the Fund's 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,
Schroder Advisors and Forum provide similar services to the Portfolio for which
Forum is entitled to separate compensation at the annual rates of 0.10% of the
Portfolio's average daily net assets. Schroder Advisors is not entitled to
separate compensation for providing such services to the Portfolio.
Accordingly, the fees paid by the Fund and/or Portfolio to SCMI and Schroder
Advisors may equal up to 0.85% 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.
For the fiscal years ended October 31, 1994, 1995 and 1996, Schroder Advisors
received fees from the Fund and Portfolio, as applicable, of $31,690, $35,594
and $14,213 (after waivers of $26,850),respectively. The Trust formerly had
entered into an Administrative Services Contract with Schroder Advisors that had
substantially similar terms and provisions in all material respects except as to
the fees payable and the circumstances under which the fees were paid.
Specifically, Schroder Advisors was entitled to a fee, payable monthly, at the
annual rate of 0.25% of the first $100 million of Fund's average daily net
assets, 0.20% of the next $150 million, and 0.175% on assets in excess of $250
million. During the periods, the Fund had invested substantially all of its
assets in the Portfolio, and, accordingly, Schroder Advisors was entitled to a
fee of only 0.325% and obligated to pay a fee to Forum Financial Services, Inc.
("FFSI") at the rate of 0.075% for sub-advisory services provided under the Sub-
Administration Agreement described below.
Under the former Sub-Administration Agreement among the Trust, SCMI, Schroder
Advisors, and FFSI, which had substantially similar terms and provisions in all
material respects to the current Subadministration Agreement for the Fund except
as to the circumstances under which the fees were paid, payment for FFSI's
services was made by Schroder Advisors and was not a separate expense of the
Fund.
Under former administration and subadministration agreements with Schroder Core,
Schroder Advisors and FFSI provided similar services to the Portfolio for which
Schroder Advisors was entitled to compensation at the annual rate of 0.00% of
the average daily net assets of the Portfolio and obligated to pay a fee to FFSI
of 0.075% for sub-administration services. The Portfolio's administration and
subadministration agreements were the same in all material respects as the
Fund's respective agreements (except as to the parties, the circumstances under
which fees were 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 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.
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<PAGE>
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. The maximum annual amount
currently payable under the Plan is 0.25%, but 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. Salary expenses of sales staff responsible for
marketing shares of the Fund may be allocated among various portfolios 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 portfolios 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 , 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. During the period from
commencement of operations through October 31, 1996, the Fund neither accrued
nor paid any dollars under the Plan.
SERVICE ORGANIZATIONS
The Trust may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services for the Fund. The Fund could pay fees (which will vary
depending upon the service provided) to Service Organizations in amounts up to
an annual rate of 0.25% of the daily net asset value of the Fund's shares owned
by shareholders with whom the Service Organization had a servicing relationship.
Services provided by Service Organizations may include providing personnel and
facilities necessary to establish and maintain certain shareholder accounts and
records; assisting in processing purchase and redemption transactions; arranging
for the wiring of funds; transmitting and receiving funds in connection with
client orders to purchase or redeem shares; verifying and guaranteeing client
signatures in connection with redemption orders, transfers among and changes in
client-designated accounts; providing periodic statements of a client's account
balances and, to the extent practicable, integrating such information with other
client transactions; furnishing periodic and annual statements and confirmations
of all purchases and redemptions of shares in a client's account; transmitting
proxy statements, annual reports, and updating prospectuses and other
communications from the Fund to clients; and 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 will be a Service
Organization or receive fees for servicing.
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Some Service Organizations could impose additional or different conditions on
their clients, such as requiring them clients 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.
PORTFOLIO ACCOUNTING
FFC, 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 FFC or by FFC upon 60 days'
written notice to the Trust.
Under its agreement, FFC 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 Securities and Exchange Commission. For its services to the Fund, FFC
is entitled to receive from the Trust a fee of $36,000 per year plus $12,000 per
year also for each class of the Fund above one. FFC is paid an additional
$24,000 per year with respect to global and international funds. In addition,
FFC is 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 that have a
monthly portfolio turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not be liable to the Trust for any action or inaction
in the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its 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 FFC and its employees, agents, officers and directors against
and from any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and all other expenses arising out
of or in any way related to FFC's actions taken or failures to act with respect
to a Fund or based, if applicable, upon information, instructions or requests
with respect to a Fund given or made to FFC by an officer of the Trust duly
authorized. This indemnification does not apply to FFC's actions taken or
failures to act in cases of FFC's own bad faith, willful misconduct or gross
negligence.
FFC assumed responsibility for fund accounting on August 15, 1994. Previously,
these services were performed by Schroders Incorporated, the parent company of
SCMI. For the fiscal years ended October 31, 1994, 1995 and 1996, the Fund and
the Portfolio paid fund accounting fees of $28,797, $36,000, and $37,972,
respectively.
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 legal and accounting expenses; Trustees' fees and expenses; insurance
premiums, custodian and
16
<PAGE>
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 are charged to the Fund; other
expenses are allocated proportionately among all the series of the Trust in
relation to the net assets of each series.
PORTFOLIO TRANSACTIONS
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 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 the transaction, for example. 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. For fiscal years ended October 31, 1994, 1995, and 1996,
the Fund paid total brokerage commissions of $29,224, $34,391, and $37,589
(including commissions paid by both the Fund and the Portfolio), respectively.
The Investment Advisory Agreement authorizes and directs SCMI to place orders
for the purchase and sale of the Fund's 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, by way
of illustration, price, transaction size, the nature of the market for the
security, commission amount, the timing of the transaction (taking into account
market prices and trends), the reputation, experience and financial stability of
the broker-dealers involved, and the quality of service rendered by the broker-
dealers in other transactions).
It has for many years been a common practice in the investment advisory business
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
17
<PAGE>
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 1934 ACT, SCMI may cause the Fund to pay a
broker-dealer that provides "brokerage and research services" (as defined in the
1934 Act) to SCMI with 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.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Trustees may determine, SCMI
may consider sales of shares of the Fund as a factor in the selection of broker-
dealers to execute portfolio transactions for the Fund.
Subject to the general policies of the Fund regarding allocation of portfolio
brokerage as set forth above, the Trust Board has authorized the Fund to employ
Schroder Wertheim & Company, Incorporated ("Schroder Wertheim") an affiliate of
SCMI, to effect securities transactions of the Fund on the New York Stock
Exchange only, provided certain other conditions are satisfied as described
below.
Payment of brokerage commissions to Schroder Wertheim or Schroder Securities or
effecting such transactions is subject to Section 17(e) of the 1940 Act, which
requires, among other things, that commissions for transactions on a national
securities exchange 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 or Schroder Securities on comparable transactions for its most favored
unaffiliated customers; and (ii) at least as favorable as those which would be
charged on comparable transactions by other qualified brokers having comparable
execution capability. The Trust Board , including a majority of the non-
interested Trustees, has adopted procedures pursuant to Rule 17e-1 promulgated
by the Securities and Exchange Commission under Section 17(e) to ensure that
commissions paid to Schroder Wertheim by the Fund satisfy the foregoing
standards. The Trust Board will review all transactions at least quarterly for
compliance with such procedures.
The Fund 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. The Fund paid no commissions to
Schroder Wertheim during the fiscal years ended October 31, 1994, 1995 and 1996.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DETERMINATION OF NET ASSET VALUE PER SHARE
The net asset value per share of the Fund is determined each day the New York
Stock Exchange (the "Exchange") is open, as of 4:00 P.M.(Eastern Time), by
dividing the value of the Fund's net assets by the total number of Fund shares
outstanding. 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 Trust Board has established procedures for the valuation of the Fund's
securities: (i) equity securities traded on a securities exchange or on the
NASDAQ National Market System for which last sale information is regularly
reported are valued at the last reported sales prices on their primary exchange
or the NASDAQ National Market System that day (or, in the absence of sales that
day, at values based on the last sale prices on the preceding trading day or
closing mid-market prices); (ii) NASDAQ and other unlisted equity securities for
which last sale prices are not regularly reported but for which over-the-counter
market quotations are readily available are valued at the most recently reported
mid-market prices; (iii) securities (including restricted securities) not having
readily-available market quotations are valued at fair value under the Trust
Board's procedures; (iv) debt securities having a maturity
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<PAGE>
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.
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.
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 will be
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 Fund's portfolio securities
could result in a less diversified portfolio of investments for the Fund and
could affect adversely the liquidity of the Fund's portfolio.
TAXATION
Under the Internal Revenue Code of 1986, as amended (the "Code"), the Fund and
each other series established from time to time by the Trust Board is treated as
a separate taxpayer for federal income tax purposes with the result that: (i)
each such series must meet separately the income and distribution requirements
for qualification as a regulated investment company; and (ii) the amounts of
investment income and capital gain earned are determined on a series-by-series
(rather than on Trust-wide) basis.
The Fund qualified for its last fiscal year as a regulated investment company
under Subchapter M of the Code and intends to so qualify each year so long as
such qualification is in the best interests of its shareholders. To do so, the
Fund intends to distribute to shareholders at least 90% of its "investment
company taxable income" as defined in the Code (which includes, dividends,
interest and the excess of any net short-term capital gain over net long-term
capital loss), and to meet certain diversification of assets, source of income,
and other requirements of the Code. The Fund will therefore not be subject to
federal income tax on its investment company taxable income and "net capital
gain" (the excess of net long-term capital gain over net short-term capital
loss) 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 this, 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 gain
or loss) for the calendar year; (ii) at least 98% of the excess of its capital
gain over capital loss realized during the one-year period ending October 31 of
such year; and (iii) all such ordinary income and capital gain 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 the calendar year in which the distributions are received.
Distributions of investment company taxable income (including realized net
short-term capital gain) are taxable to shareholders as ordinary income.
Generally, dividends of investment income (but not capital gain) from the Fund
will qualify for the federal dividends-received deduction for corporate
shareholders to the extent such dividends do not exceed the aggregate amount of
dividends received by the Fund from domestic corporations, provided the Fund
shares are held by said shareholders for more than 45 days. If securities held
by the Fund are considered to be "debt-financed" (generally, acquired with
borrowed funds), are held by the Fund for less than 46 days (91 days in the case
of certain preferred stock), or are subject to certain forms of hedges or short
sales, the portion of the
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dividends paid by the Fund that corresponds to the dividends paid with respect
to such securities will not be eligible for the corporate dividends-received
deduction.
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 of 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 to shareholders are taxable whether reinvested in additional
shares or received in cash. Shareholders that reinvest distributions in
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. If a
distribution reduces 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 which will be returned to the investor in the form
of a taxable distribution.
Upon redemption or sale of shares, a shareholder will realize a taxable gain or
loss which 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.
The Trust will be required to report to 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 the withholding of federal income tax at a rate of 31% ("backup
withholding") in the case of non-exempt shareholders if: (i) the shareholder
fails to furnish the Trust with and to certify the shareholder's correct
taxpayer identification number or social security number; (ii) the IRS notifies
the Trust that the shareholder has failed to report properly 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 they are 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 advisors 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 its Trust Board to
establish a series of separately managed investment portfolios, each
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having different investment objectives 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 to its present name. The Trust is registered as an open-end management
investment company under the 1940 Act.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private
corporations for profit. 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 portfolio is unable to meet its obligations.
Forum believes that, in view of the above, there is no risk of personal
liability to shareholders.
CAPITALIZATION AND VOTING
The Trust has an unlimited number of authorized shares of beneficial interest.
The Trust Board may, without shareholder approval, divide the authorized shares
into an unlimited number of separate portfolios or series (such as the Fund) and
may divide such portfolios or series into classes of shares, and the costs of
doing so will be borne by the Trust. The Trust currently consists of five
separate portfolios, each of which has separate investment objectives and
policies, and five classes, two of which pertains to the Schroder Fund.
The Shares of the Fund are fully paid and nonassessable, and have no preferences
as to conversion, exchange, dividends, retirement or other features. The 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. Each
shareholder of record 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 portfolio 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 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, 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
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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.
PRINCIPAL SHAREHOLDERS
As of February 24, 1997, the following persons owned of record or beneficially
5% or more of the Fund's shares:
SHAREHOLDER SHARE BALANCE PERCENT OF FUND
- ----------- ------------- ---------------
Donaldson Lufkin & Jenrette 3,240.042 62.02%
P O Box 2052
Jersey City, NJ 07303
National Investors Services Corp. 1,983.927 37.98%
75 Wall Street
New York, NY 10265
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.
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 (up to the life of the Fund), calculated
pursuant to the following formula:
n
P (1+T) = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = 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.
For the one year, and since inception periods ended October 31, 1996, the
average annual total return of the Fund with respect to Investor Shares was
29.35% and 24.60%, respectively.
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 performance which may be expected in the future.
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 which 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 Service 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
22
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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
All securities and cash of the Fund are held by The Chase Manhattan Bank, N.A.,
Chase MetroTech Center, Brooklyn, New York 11245.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp., Portland, Maine, acts as the Fund's transfer agent and
dividend disbursing agent.
LEGAL COUNSEL
Jacobs Persinger & Parker, 77 Water Street, New York, New York 10005, counsel
to the Fund, passes upon certain legal matters in connection with the shares
offered by the Fund.
INDEPENDENT ACCOUNTANTS
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. Securities and Exchange Commission filings. Their 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 Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The registration
statement, including the exhibits filed therewith, may be examined at the office
of the Securities and Exchange Commission in Washington, D.C.
Statements contained herein and in the Prospectus 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 audited Statement of Assets and Liabilities, Statement of Operations,
Statements of Changes in Net Assets, Statement of Investments, notes thereto,
and Financial Highlights of the Fund for the fiscal year ended October 31, 1996
and the Report of Independent Accountants thereon (included in the Annual Report
to shareholders), which are delivered along with this SAI, are incorporated
herein by reference.
23
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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.
"A" Fixed-income securities which are rated "A" possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
"Baa" Fixed-income securities which are rated "Baa" are considered as medium
grade obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
fixed-income securities lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Fixed-income securities rated "Aaa", "Aa", "A" and "Baa" are considered
investment grade.
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.
A-1
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STANDARD & 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.
"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.
"A" Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than fixed-income securities in higher-rated
categories.
"BBB" Fixed-income securities rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for fixed-income securities in this
category than for fixed-income securities in higher-rated categories.
Fixed-income securities rated "AAA", "AA", "A" and "BBB" are considered
investment grade.
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
