SCHRODER EMERGING MARKETS FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1997,
AS AMENDED DECEMBER 10, 1997
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[WORLD GRAPHIC]
INVESTMENT ADVISER
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Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
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Schroder Fund Advisors Inc. ("Schroder Advisors")
SUBADMINISTRATOR
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Forum Administrative Services, LLC ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
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Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
Investor Shares of Schroder Emerging Market Fund (the "Fund") are offered for
sale at net asset value with no sales charge as an investment vehicle for
individuals, institutions, corporations and fiduciaries. Advisor Shares of the
Fund also are offered for sale at net asset value to individual investors, in
most cases through Service Organizations (as defined in the prospectuses) at
lower investment minimums but higher expenses than Investor Shares.
This Statement of Additional Information ("SAI") is not a prospectus and is
authorized for distribution only when preceded or accompanied by the Fund's
current prospectuses dated October 1, 1997, as amended December 10, 1997 and as
may be further 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.
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TABLE OF CONTENTS
INTRODUCTION..................................................3
INVESTMENT POLICIES...........................................3
Forward Foreign Currency Exchange Contracts...................3
Options and Futures Transactions..............................4
Warrants and Stock Rights.....................................12
Convertible Securities........................................13
Debt-to-Equity Conversions....................................13
U.S. Government Securities....................................13
Bank Obligations..............................................13
Short-Term Debt Securities....................................14
Repurchase Agreements.........................................14
Liquidity.....................................................14
Loans of Portfolio Securities.................................14
INVESTMENT RESTRICTIONS.......................................15
Nonfundamental Limitations....................................16
MANAGEMENT....................................................17
Officers and Trustees.........................................17
Investment Adviser............................................19
Administrative Services.......................................20
Distribution of Fund Shares...................................21
Service Organizations.........................................22
Fund 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
Performance Information.......................................30
Principal Shareholders........................................30
Custodian.....................................................30
Transfer Agent and Dividend Disbursing Agent..................31
Legal Counsel.................................................31
Independent Accountant........................................31
Registration Statement........................................31
Financial Statements..........................................31
APPENDIX......................................................A-1
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INTRODUCTION
Schroder Emerging Markets Fund is a non-diversified, separately managed series
of Schroder Capital Funds (Delaware) (the "Trust"), an open-end management
investment company currently consisting of nine separate series, each of which
has a different investment objective and policies.
The Fund's investment objective is to seek to achieve long-term capital
appreciation. It seeks to achieve this objective through investment in equity
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 substantially all of
its assets in Schroder Emerging Markets 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.
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.
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
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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 less 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.
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.
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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.
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
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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 or other
high-grade debt obligations, or other high-quality liquid securities, 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).
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
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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 or other high-grade
obligations, or other high-quality liquid securities, 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 or
other high-grade debt obligations, or other high-quality liquid securities, that
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: (1) to receive the
income derived from the premiums paid by purchasers; (2) 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 (3) 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 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
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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, U.S. Government or
other high-grade short-term obligations, or other high-quality liquid
securities, 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: (1) insufficient trading interest in certain options; (2)
restrictions on transactions imposed by an exchange; (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (4) interruption of the normal
operations on an exchange; (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume; or (6) 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.
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 company and the Portfolio's intention to operate
in such a manner as to permit a fund invested in the Portfolio 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").
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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-a-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, U.S. government or other high-grade
short-term obligations, or other high-quality liquid securities, 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
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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
creates 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.
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
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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, or other
high-quality liquid securities, 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.
In addition, if the Portfolio holds a long position in a futures contract, it
will hold cash, U.S. government or other high-grade debt obligations, or other
high-quality liquid securities, 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
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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 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
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and the Portfolio's intention to operate in such a manner as to permit a fund
invested in the Portfolio 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.
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, therefore, intends to
invest the Portfolio's assets 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). 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
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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 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.
LIQUIDITY
"Liquidity" 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, SCMI
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
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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. If SCMI determines that
a "restricted security" is liquid pursuant to guidelines adopted by the Schroder
Core Board, the security is not deemed illiquid. These guidelines take into
account trading activity for the securities and the availability of reliable
pricing information, among other factors. If there is a lack of trading interest
in a particular restricted security, that security may become illiquid, which
could affect the Portfolio's liquidity.
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: (1) on each business day, at least
equal the market value of the loaned securities; and (2) consist of cash, bank
letters of credit, U.S. government securities, other cash equivalents or liquid
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 Schroder Core 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.
The market value of portfolio securities purchased with cash collateral may
decline. Loans of securities by the Portfolio are 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 the Schroder Core Board.
INVESTMENT RESTRICTIONS
The following investment restrictions restate or are in addition to those
described under "Investment Restrictions" and "Investment Policies" in the
Prospectus. These restrictions, unless otherwise indicated, are fundamental
policies of the Fund and Portfolio and cannot be changed without the vote of a
"majority" of the Fund's or Portfolio's outstanding shares. Under the 1940 Act,
such a "majority" vote is defined as the vote of the holders of the lesser of:
(1) 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 (2) more than 50% of the outstanding shares. Under these additional
restrictions, the Fund and Portfolio will not:
1. INDUSTRY CONCENTRATION
purchase a security if, as a result, more than 25% of the
Fund's or Portfolio's total assets would be invested in
securities of issuers conducting their principal business
activities in the same industry. For purposes of this
limitation, there is no limit on: (1) investments in U.S.
government securities, in repurchase agreements covering
U.S. government securities, in securities issued by the
states, territories or possessions of the United States
("municipal securities") or in foreign government
securities; or (2) investment in issuers domiciled in a
single jurisdiction. Notwithstanding anything to the
contrary, to the extent permitted by the 1940 Act, the Fund
or Portfolio may invest in one or more investment companies;
provided that, except to the extent the it invests in other
investment companies pursuant to Section 12(d)(1)(A) of the
1940 Act, the Fund or Portfolio treats the assets of the
investment companies in which it invests as its own for
purposes of this policy.
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2. BORROWING
borrow money if, as a result, outstanding borrowings would
exceed an amount equal to one third of the Fund's or
Portfolio's total assets.
3. REAL ESTATE
purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Fund or Portfolio from investing in securities
or other instruments backed by real estate or securities of
companies engaged in the real estate business).
4. LENDING
make loans to other parties. For purposes of this limitation,
entering into repurchase agreements, lending securities and
acquiring any debt security are not deemed to be the making of
loans.
5. COMMODITIES
purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the Fund or Portfolio from purchasing
or selling options and futures contracts or from investing in
securities or other instruments backed by physical
commodities).
6. UNDERWRITING
underwrite (as that term is defined in the Securities Act of
1933, as amended) securities issued by other persons except,
to the extent that in connection with the disposition of its
assets, the Fund or Portfolio may be deemed to be an
underwriter.
7. SENIOR SECURITIES
issue any class of senior securities except to the extent
consistent with the 1940 Act.
NONFUNDAMENTAL LIMITATIONS
The Fund and Portfolio have each adopted the following nonfundamental investment
limitations. A nonfundamental policy does not override a fundamental limitation.
The policies of the Portfolio may be changed by the Schroder Core Board without
approval of its interestholders or Fund shareholders.
1. DIVERSIFICATION
The Fund and Portfolio are each "non-diversified" as that
term is defined in the 1940 Act. To the extent required to
qualify as a regulated investment company under the Code,
the Fund or Portfolio may not purchase a security (other
than a U.S. government security or a security of an
investment company) if, as a result: (1) with respect to 50%
of its assets, more than 5% of the Fund's or Portfolio's
total assets would be invested in the securities of any
single issuer; (2) with respect to 50% of its assets, the
Fund or Portfolio would own more than 10% of the outstanding
securities of any single issuer; or (3) more than 25% of the
Fund's or Portfolio's total assets would be invested in the
securities of any single issuer.
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2. BORROWING
for purposes of the limitation on borrowing, the following
are not treated as borrowings to the extent they are fully
collateralized: (1) the delayed delivery of purchased
securities (such as the purchase of when-issued securities);
(2) reverse repurchase agreements; (3) dollar-roll
transactions; and (5) the lending of securities ("leverage
transactions"). (See fundamental Limitation No. 3
"Borrowing" above.
3. LIQUIDITY
invest more than 15% of its net assets in: (1) securities that
cannot be disposed of within seven days at their then-current
value; (2) repurchase agreements not entitling the holder to
payment of principal within seven days; and (3) securities
subject to restrictions on the sale of the securities to the
public without registration under the 1933 Act ("restricted
securities") that are not readily marketable. The Fund or
Portfolio may treat certain restricted securities as liquid
pursuant to guidelines adopted by the Board or Schroder Core
Board, as the case may be.
4. EXERCISING CONTROL OF ISSUERS
make investments for the purpose of exercising control of an
issuer. Investments by the Fund or Portfolio in entities
created under the laws of foreign countries solely to
facilitate investment in securities in that country will not
be deemed the making of investments for the purpose of
exercising control.
5. OTHER INVESTMENT COMPANIES
invest in securities of another investment company, except to
the extent permitted by the 1940 Act.
6. SHORT SALES AND PURCHASING ON MARGIN
sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the
securities sold short (short sales "against the box"), and
provided that transactions in futures contracts and options
are not deemed to constitute selling securities short.
purchase securities on margin, except that the Fund or
Portfolio may use short-term credit for the clearance of its
portfolio's transactions, and provided that initial and
variation margin payments in connection with futures contracts
and options on futures contracts shall not constitute
purchasing securities on margin.
7. LENDING
lend a security if, as a result, the amount of loaned
securities would exceed an amount equal to one third of the
Fund's or Portfolio's total assets.
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 and Schroder Capital Funds II, another
registered investment company in the Schroder family of funds.
17
<PAGE>
PETER E. GUERNSEY, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Insurance Consultant since August 1986; prior thereto
Senior Vice President, Marsh & McLennan, Inc., insurance brokers.
JOHN I. HOWELL, 80, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Private Consultant since February 1987; Honorary Director,
American International Group, Inc.; Director, American International Life
Assurance Company of New York.
CLARENCE F. MICHALIS, 75, c/o the Trust, Two Portland Square, Portland, Maine -
Trustee of the Trust; Chairman of the Board of Directors, Josiah Macy, Jr.
Foundation (charitable foundation).
HERMANN C. SCHWAB, 77, c/o the Trust, Two Portland Square, Portland, Maine -
Chairman and Trustee of the Trust; retired since March, 1988; prior thereto,
consultant to SCMI since February 1, 1984.
MARK J. SMITH*, 35, 33 Gutter Lane, London, England - President and Trustee of
the Trust; Senior Vice President and Director of SCMI since April 1990; Director
and Senior Vice President, Schroder Advisors.
MARK ASTLEY, 33, 787 Seventh Avenue, New York, New York - Vice President of the
Trust; First Vice President of SCMI, prior thereto, employed by various
affiliates of SCMI in various positions in the investment research and portfolio
management areas since 1987.
ROBERT G. DAVY, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCMI and Schroder Capital Management International Ltd.
since 1994; First Vice President of SCMI since July, 1992; prior thereto,
employed by various affiliates of SCMI in various positions in the investment
research and portfolio management areas since 1986.
MARGARET H. DOUGLAS-HAMILTON, 55, 787 Seventh Avenue, New York, New York - Vice
President of the Trust; Secretary of SCM since July 1995; Senior Vice President
(since April 1997) and General Counsel of Schroders Incorporated since May 1987;
prior thereto, partner of Sullivan & Worcester, a law firm.
RICHARD R. FOULKES, 51, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Deputy Chairman of SCMI since October 1995; Director and Executive
Vice President of Schroder Capital Management International Ltd.
since 1989.
JOHN Y. KEFFER, 54, Two Portland Square, Portland, Maine - Vice President of the
Trust; President of FFC, the Fund's transfer and dividend disbursing agent and
other affiliated entities including Forum Financial Services, Inc. and Forum
Advisors, Inc.
JANE P. LUCAS, 35, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director and Senior Vice President SCMI; Director of SCM since
September 1995; Director of Schroder Advisors since September 1996; Assistant
Director Schroder Investment Management Ltd. since June 1991.
CATHERINE A. MAZZA, 37, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; President of Schroder Advisors since 1997; First Vice President of
SCMI and SCM since 1996; prior thereto, held various marketing positions at
Alliance Capital, an investment adviser, since July 1985.
MICHAEL PERELSTEIN, 41, 787 Seventh Avenue, New York, New York - Vice President
of the Trust; Director since May 1997 and Senior Vice President of SCMI since
January 1997; prior thereto, Managing Director of MacKay - Shields Financial
Corp.
ALEXANDRA POE, 36, 787 Seventh Avenue, New York, New York - Secretary and Vice
President of the Trust; Vice President of SCMI since August 1996; Fund Counsel
and Senior Vice President of Schroder Advisors since August 1996; Secretary of
Schroder Advisors; prior thereto, an investment management attorney with Gordon
Altman Butowsky Weitzen Shalov & Wein since July 1994; prior thereto counsel and
Vice President of Citibank, N.A. since 1989.
18
<PAGE>
THOMAS G. SHEEHAN, 42, Two Portland Square, Portland, Maine - Acting Treasurer,
since September, 1997, and Assistant Secretary of the Trust; Counsel, Forum
Financial Services, Inc. since 1993; prior thereto, Special Counsel, U.S.
Securities and Exchange Commission, Division of Investment Management,
Washington, D.C.
FARIBA TALEBI, 36, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Group Vice President of SCMI since April 1993, employed in various
positions in the investment research and portfolio management areas since 1987;
Director of SCM since April 1997.
JOHN A. TROIANO, 38, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Director of SCM since April 1997; Chief Executive Officer, since July
1, 1997, of SCMI and Managing Director and Senior Vice President of SCMI since
October 1995; prior thereto, employed by various affiliates of SCMI in various
positions in the investment research and portfolio management areas since 1981.
IRA L. UNSCHULD, 31, 787 Seventh Avenue, New York, New York - Vice President of
the Trust; Vice President of SCMI since April, 1993 and an Associate from July,
1990 to April, 1993.
CATHERINE S. WOOLEDGE, 55, Two Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since November 1996. Prior thereto, associate at Morrison &
Foerster, Washington, D.C. from October 1994 to November 1996, associate
corporate counsel at Franklin Resources, Inc. from September 1993 to September
1994, and prior thereto associate at Drinker Biddle & Reath, Philadelphia, PA.
* Interested Trustee of the Trust within the meaning of the 1940 Act.
Schroder Advisors is a wholly owned subsidiary of SCMI, which is a wholly owned
subsidiary of Schroders Incorporated, which in turn is an indirect, wholly owned
U.S. subsidiary of Schroders plc. Schroder Capital Management Inc. ("SCM") is
also a wholly owned subsidiary of Schroders Incorporated.
Officers and Trustees who are interested persons of the Trust 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
certain funds' fiscal year ended October 31, 1996.
<TABLE>
<S> <C> <C> <C> <C>
Name of Trustee Aggregate Pension or Estimated Annual Total
Compensation From Retirement Benefits Upon Compensation From
Trust Benefits Accrued Retirement Trust And Fund
As Part of Trust Complex Paid To
Expenses Trustees
- -------------------------------- -------------------- -------------------- --------------------- -------------------
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 October 1, 1997, the Fund had no 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
19
<PAGE>
sets 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 $1750 billion as of September 30,
1997.
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 SCMI's
responsibility 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 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: (1) by the holders of a majority of the outstanding voting
securities of the Portfolio or by Schroder Core Board; and (2) by a majority of
the Trustees who are not parties to the Agreement or "interested persons" (as
defined in the 1940 Act) of any 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.
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 has retained 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, and the jurisdiction whose laws
govern the agreement). During a time that the Fund did not have substantially
all of its assets invested in the Portfolio or another investment company, 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, under which Schroder Advisors provides management and
administrative services necessary for the operation of the Fund,
20
<PAGE>
including: (1) preparation of shareholder reports and communications; (2)
regulatory compliance, such as reports to and filings with the Securities and
Exchange Commission and state securities commissions; and (3) 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.
For providing administrative services Schroder Advisors is entitled to receive
from the Fund a fee, payable monthly, 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. For providing its services, Forum is
entitled to receive a monthly fee from the Fund at the annual rate of 0.075% of
the average daily net assets. The Subadministration Agreement is terminable with
respect to the Fund without penalty, at any time, by the Trust Board, upon 60
days' written notice to Forum or by Forum upon 60 days' written notice to the
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 0.10% and 0.075%, 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 and the fees payable thereunder).
The fees paid by the Fund and Portfolio to SCMI and Schroder Advisors may equal
up to 1.25% 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.
DISTRIBUTION OF FUND SHARES
Schroder Advisors, 787 Seventh Avenue, New York, New York 10019, serves as
Distributor of 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.
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: (1)
advertising expenses including advertising by radio, television, newspapers,
magazines, brochures, sales literature or direct mail; (2) costs of printing
prospectuses and other materials to be given or sent to prospective investors;
(3) 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 (4) payments to broker-dealers (other than the Distributor) or
other organizations for services rendered in the distribution of the Fund's
shares, including
21
<PAGE>
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 (the
"disinterested Trustees"), 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 disinterested
Trustees. The Plan has been approved, and is subject to annual approval, by the
Trust Board and by the disinterested Trustees, 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
disinterested Trustees or by vote of the holders of a majority of the shares of
the Fund. During the periods ended October 31, 1997, the Fund had no shares
outstanding and, therefore, 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's Advisor Shares. The Fund may pay fees
(which may vary depending upon the services provided) to Service Organizations
in amounts up to an annual rate of 0.25% of the daily net asset value of the
Fund's Advisor Shares owned by shareholders with whom the Service Organization
has a servicing relationship. Services provided by Service Organizations may
include: (1) providing personnel and facilities necessary to establish and
maintain certain shareholder accounts and records; (2) assisting in processing
purchase and redemption transactions; (3) arranging for the wiring of funds;
transmitting and receiving funds in connection with client orders to purchase or
redeem shares; (4) verifying and guaranteeing client signatures in connection
with redemption orders, transfers among and changes in client-designated
accounts; (5) providing periodic statements of a client's account balances and,
to the extent practicable, integrating such information with other client
transactions; (6) furnishing periodic and annual statements and confirmations of
all purchases and redemptions of shares in a client's account; (7) transmitting
proxy statements, annual reports, and updating prospectuses and other
communications from the Fund to clients; and (8) 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, would make no such payments until the
Trust Board specifically so authorizes.
Some Service Organizations may 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 agrees to
transmit to its clients a schedule of any such fees. Shareholders using Service
Organizations are 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
22
<PAGE>
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 Fund shareholders, 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.
FUND ACCOUNTING
FFC, an affiliate of Forum, performs fund accounting services for the Fund
pursuant to an 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.
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 a pro rata portion of legal and accounting expenses; Trustees' fees and
expenses; insurance premiums, custodian and transfer agent 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.
Advisor Shares or Investor Shares also bear any class-specific expenses, such as
fees payable to Service Organizations. 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.
23
<PAGE>
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-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
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
24
<PAGE>
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.
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: (1) 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 (2) Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities"), affiliates of
SCMI, to effect securities transactions of the Portfolio on various foreign
securities exchanges on which Schroder Securities has trading privileges,
provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder 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: (1) 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 (2) 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 under the 1940 Act to ensure that commissions paid to Schroder Wertheim or
Schroder Securities by the Portfolio satisfy the foregoing standards. Such
procedures are reviewed periodically by the Schroder Core Board, including a
majority of the non-interested Trustees. The Schroder Core Board also reviews
all transactions at least quarterly for compliance with such procedures.
It is further a policy of the Portfolio that all such transactions effected 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.
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 it regularly engages in securities transactions.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
DETERMINATION OF NAV PER SHARE
The NAV per share of the Fund is determined as of 4:00 p.m. (Eastern time) each
day the New York Stock 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
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valuation. The Exchange's most recent holiday schedule (which is subject to
change) states that it will close on New Year's Day, Martin Luther King, Jr.'s
Birthday, 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: (1) equity securities listed or traded on the New York
or American Stock Exchange or other domestic or foreign stock exchange are
valued at their latest sale prices on such exchange that day prior to the time
when assets are valued; in the absence of sales that day, such securities are
valued at the mid-market prices (in cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by the Fund's investment adviser); (2) unlisted equity securities
for which over-the-counter market quotations are readily available are valued at
the latest available mid-market prices prior to the time of valuation; (3)
securities (including restricted securities) not having readily-available market
quotations are valued at fair value under the Schroder Core Board's procedures;
(4) 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 (5) short-term debt
securities (having a remaining maturity of 60 days or less) are valued at cost,
adjusted for amortization of premiums and accretion of discount.
When an option is written, an amount equal to the premium received 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
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: (1)
each such series must meet separately the income and distribution requirements
for qualification as a regulated investment company; and (2) 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
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to the sum of: (1) at least 98% of its ordinary income (excluding any capital
gain or loss) for the calendar year; (2) 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 (3) 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 Fund shares 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.
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 to Fund 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.
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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.
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
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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: (1) the
shareholder fails to furnish the Trust with and to certify the shareholder's
correct taxpayer identification number or social security number; (2) 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 (3) 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.
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 may be borne by a
series or a class or the Trust in accordance with the Trust Instrument. The
Trust currently consists of nine separate series, each of which has a separate
investment objective and policies. Some series offer two classes of shares,
Investor Shares and Advisor Shares.
When issued for the consideration described in the prospectuses or under the
applicable dividend reinvestment plan, shares are fully paid, nonassessable, and
have no preferences as to conversion, exchange, dividends, retirement or other
features. Shares have no preemptive rights and have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do so.
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
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changes in investment objectives and other fundamental policies affecting the
portfolio 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 be entitled to vote on
any matters as to which such series or class is not affected.
The Trust does 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 are not submitted to shareholders unless
a meeting of shareholders is held for some other reason, such as those indicated
below. Each of the Trustees serves until death, resignation or removal.
Vacancies are 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 is 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: (1)
shares of the Trust having a total net asset value of at least $25,000; or (2)
1% of the outstanding shares of the Trust, to help such holders communicate with
other shareholders of the Trust with a view to obtaining the requisite
signatures to request a special meeting to consider Trustee removal.
PERFORMANCE INFORMATION
Performance quotations of the average annual total return and cumulative total
return of each fund or class of shares is provided 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 fund or class
over periods of 1, 5 and 10 years (or since commencement of operations if any of
these periods are not available), calculated pursuant to the following formula:
P (1+T)n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = 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 an annual basis and generally assume that all
dividends and distributions are reinvested in shares of the same class when
paid.
Quotations of cumulative total return reflect only the performance of a
hypothetical investment in a fund or a class during the particular time period
shown. Cumulative total returns vary based on changes in market conditions and
the level of a fund's and any applicable class's expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
In communications to current or prospective shareholders, performance figures
such as cumulative total return, also may be compared with the performance of
other mutual funds tracked by mutual fund rating services or to
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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 fund or class through a customer
account maintained at a financial institution or a Service Organization may be
charged one or more of the following types of fees as agreed upon by the
financial institution or Service Organization and the investor, with respect to
the customer services provided: (1) account fees (a fixed amount per month or
per year); (2) transaction fees (a fixed amount per transaction processed); (3)
compensating balance requirements (a minimum dollar amount a customer must
maintain in order to obtain the services offered); or (4) 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.
PRINCIPAL SHAREHOLDERS
As of October 1, 1997, the Fund had no outstanding shares.
CUSTODIAN
The Chase Manhattan Bank, 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
ROPES & GRAY, One International Place, Boston, Massachusetts 02110-2624, counsel
to the Trust, 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.
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
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documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The fiscal year end of the Fund is May 31. Financial statements for the Fund's
semi-annual period and fiscal year will be distributed to shareholders of
record. The Board in the future may change the fiscal year end of the Fund.
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APPENDIX
RATINGS OF CORPORATE DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
FIXED-INCOME SECURITY RATINGS
Aaa Fixed-income securities which are rated "Aaa" are judged to be
of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Fixed-income securities which are rated "Aa" are judged to be of
high quality by all standards. Together with the "Aaa" group
they comprise what are generally known as high grade
fixed-income securities. They are rated lower than the best
fixed-income securities because margins of protection may not be
as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
A Fixed-income securities which are rated "A" possess many
favorable investment attributes and are to be considered as
upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime
in the future.
Baa Fixed-income securities which are rated "Baa" are considered as
medium grade obligations; i.e., they are neither highly
protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable
over any great length of time. Such fixed-income securities lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Fixed-income securities rated "Aaa", "Aa", "A" and "Baa" are
considered investment grade.
Ba Fixed-income securities which are rated "Ba" are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate, and therefore not well safeguarded during
both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B Fixed-income securities which are rated "B" generally lack
characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa Fixed-income securities which are rated "Caa" are of poor
standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest.
Ca Fixed-income securities which are rated "Ca" present obligations
which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
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C Fixed-income securities which are rated "C" are the lowest rated
class of fixed-income securities, and issues so rated can be
regarded as having extremely poor prospects of ever attaining
any real investment standing.
Rating Refinements: Moody's may apply numerical modifiers, "1",
"2", and "3" in each generic rating classification from "Aa" through "B" in its
municipal fixed-income security rating system. The modifier "1" indicates that
the security ranks in the higher end of its generic rating category; the
modifier "2" indicates a mid-range ranking; and a modifier "3" indicates that
the issue ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. The ratings apply to Municipal Commercial Paper as well as taxable
Commercial Paper. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: "Prime-1", "Prime-2", "Prime-3".
Issuers rated "Prime-1" have a superior capacity for repayment of
short-term promissory obligations. Issuers rated "Prime-2" have a strong
capacity for repayment of short-term promissory obligations; and Issuers rated
"Prime-3" have an acceptable capacity for repayment of short-term promissory
obligations. Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
STANDARD & POOR'S RATING GROUP("STANDARD & POOR'S")
FIXED-INCOME SECURITY RATINGS
A Standard & Poor's fixed-income security rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
AAA Fixed-income securities rated "AAA" have the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA Fixed-income securities rated "AA" have a very strong capacity
to pay interest and repay principal and differs from the
highest-rated issues only in small degree.
A Fixed-income securities rated "A" have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions than fixed-income securities in
higher-rated categories.
A-2
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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.
BB Fixed-income securities rated "BB" have less near-term
vulnerability to default than other speculative grade
fixed-income securities. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity or
willingness to pay interest and repay principal.
B Fixed-income securities rated "B" have a greater vulnerability
to default but presently have the capacity to meet interest
payments and principal repayments. Adverse business, financial
or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC Fixed-income securities rated "CCC" have a current identifiable
vulnerability to default, and the obligor is dependent upon
favorable business, financial and economic conditions to meet
timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it
is not likely to have the capacity to pay interest and repay
principal.
CC The rating "CC" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or
implied "CCC" rating.
C The rating "C" is typically applied to fixed-income securities
subordinated to senior debt which is assigned an actual or
implied "CCC-" rating.
CI The rating "CI" is reserved for fixed-income securities on which
no interest is being paid.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of obligation
as a matter of policy.
Fixed-income securities rated "BB", "B", "CCC", "CC" and "C" are
regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal.
"BB" indicates the least degree of speculation and "C" the
highest degree of speculation. While such fixed-income
securities will likely have some quality and protective
characteristics, these are out-weighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or minus (-): The rating from "AA" TO "CCC" may be
modified by the addition of a plus or minus sign to show
relative standing with the major ratings categories.
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The commercial paper rating is not a
recommendation to purchase or sell a security. The ratings are based upon
current information furnished by the issuer or obtained by Standard & Poor's
from other sources it considers reliable. The ratings may be changed, suspended,
or withdrawn as a result of changes in or unavailability of such information.
Ratings are graded into group categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper.
A-3
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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-4
<PAGE>
COUNTRIES EXCLUDED FROM EMERGING MARKET CATEGORY
Australia The Netherlands
Austria New Zealand
Belgium Norway
Canada Portugal
Denmark Singapore
Finland Spain
France Sweden
Germany Switzerland
Ireland United Kingdom
Italy USA
Japan
A-5
