<PAGE>
As filed with the Securities and Exchange Commission on January 29, 1997
File No. 2-34215
File No. 811-1911
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 57
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 38
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SCHRODER CAPITAL FUNDS (DELAWARE)
(FORMERLY SCHRODER CAPITAL FUNDS, INC.)
(Exact Name of Registrant as Specified in Charter)
Two Portland Square, Portland, Maine 04101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: 207-879-1900
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Thomas G. Sheehan, Esq.
Forum Financial Services, Inc.
Two Portland Square, Portland, Maine 04101
(Name and Address of Agent for Service)
Copies of Communications to:
Scott M. Shepard, Esq.
Jacobs Persinger & Parker
77 Water Street, New York, New York 10005
Alexandra Poe, Esq.
Schroder Capital Management International Inc.
787 Seventh Avenue, 34th Floor
New York, New York 10019
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It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485, paragraph (b)
on [ ] pursuant to Rule 485, paragraph (b)
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60 days after filing pursuant to Rule 485, paragraph (a)(i)
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on _________ pursuant to Rule 485, paragraph (a)(i)
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X 75 days after filing pursuant to Rule 485, paragraph (a)(ii)
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on [ ] pursuant to Rule 485, paragraph (a)(ii)
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this post-effective amendment designates a new effective date for a
- ----- previously filed post-effective amendment.
The Registrant has registered an indefinite number of shares of beneficial
interest under the Securities Act of 1933 (the "1933 Act") pursuant to Rule
24f-2 under the Investment Company Act of 1940 (the "1940 Act"). Accordingly,
no fee is payable herewith. A Rule 24f-2 Notice for the Registrant's fiscal
year ended October 31, 1996 was filed with the Commission on or about December
27, 1996. SCHRODER INTERNATIONAL BOND FUND OF REGISTRANT IS STRUCTURED AS A
MASTER-FEEDER FUND. THIS AMENDMENT INCLUDES A MANUALLY EXECUTED SIGNATURE PAGE
FOR THE MASTER FUND.
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CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART A
(Prospectuses offering Advisor Shares and Investor Shares
of Schroder International Bond Fund.)
Form N-1A
Item No. (Caption) Location in Prospectus (Caption)
- ---------- ------------------------------- --------------------------------
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Not Applicable
4. General Description of Investment Objective and
Registrant Policies; Additional Investment
Policies and Risk Considerations
5. Management of the Fund Management of the Fund - Board
of Trustees; Investment Adviser
and Portfolio Manager;
Administrative Services;
Distribution Plan & Shareholder
Services Plan; Expenses;
Portfolio Transactions
5A. Management's Discussion of Not Applicable
Fund Performance
6. Capital Stock and Other Securities Other Information -
Capitalization and Voting;
Shareholder Inquiries; Dividends,
Other Distributions and Taxes
7. Purchase of Securities Investment in the Fund - Purchase
of Shares; Retirement Plans;
Individual Retirement Accounts;
Net Asset Value
8. Redemption or Repurchase Investment in the Fund -
Redemption of Shares; Net Asset
Value
9. Pending Legal Proceedings Not Applicable
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART A
(All other Prospectuses)
Not Applicable in this Filing
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART B
(SAI offering shares of Schroder International Bond Fund)
Form N-1A Location in Statement of
Item No. (Caption) Additional Information (Caption)
- ---------- ------------------------------- --------------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Other Information - Organization
13. Investment Objectives and Policies Investment Policies; Investment
Restrictions
14. Management of the Fund Management - Officers and
Directors
15. Control Persons and Principal Not Applicable
Holders of Securities
16. Investment Advisory and Management - Investment Adviser;
Other Services Officers and Trustees;
Administrative Services;
Distribution of Fund Shares;
Service Organizations; Portfolio
Accounting; Fees and Expenses;
Portfolio Transactions -
Investment Decisions; Brokerage
and Research Services; Other
Information - Custodian; Transfer
Agent and Dividend Disbursing
Agent; Legal Counsel; Independent
Accountants
17. Brokerage Allocation and Portfolio Transactions
Other Practices
18. Capital Stock and Other Securities Other Information -
Capitalization and Voting
19. Purchase, Redemption and Pricing of Determination of Net Asset Value
Securities Being Offered Per Share
20. Tax Status Taxation
21. Underwriters Management - Distribution of Fund
Shares; Fees and Expenses
22. Calculation of Performance Data Other Information - Performance
Information
23. Financial Statements Not Applicable
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 404(c))
PART B
(All other SAIs)
Not Applicable in this Filing
<PAGE>
SCHRODER INTERNATIONAL
BOND FUND
Investor Shares
This fund seeks a high rate of total return by investing primarily in a
portfolio of non-U.S. debt securities.
PROSPECTUS
MARCH 1, 1997
[World Map]
1-800-290-9826
SCHRODER CAPITAL FUNDS (DELAWARE) IS A FAMILY OF OPEN-END INVESTMENT COMPANIES
COMMONLY KNOWN AS MUTUAL FUNDS. THE SHARES OF MUTUAL FUNDS ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER GOVERNMENT AGENCY. THE SHARES ALSO ARE NOT OBLIGATIONS, DEPOSITS OR
ACCOUNTS OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR ITS AFFILIATES.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING SUBSTANTIALLY
ALL OF ITS ASSETS IN SCHRODER INTERNATIONAL BOND PORTFOLIO, (THE "PORTFOLIO"),
WHICH IN TURN INVESTS PRIMARILY IN A PORTFOLIO OF NON-U.S. DEBT SECURITIES. THE
PORTFOLIO IS A SEPARATELY MANAGED SERIES OF SCHRODER CAPITAL FUNDS II ("SCHRODER
CORE II"), AN OPEN-END, MANAGEMENT INVESTMENT COMPANY REGISTERED UNDER THE 1940
ACT. THE PORTFOLIO HAS AN IDENTICAL INVESTMENT OBJECTIVE AND SUBSTANTIALLY
SIMILAR INVESTMENT POLICIES AS THE FUND (SEE "OTHER INFORMATION - FUND
STRUCTURE"). ACCORDINGLY, THE INVESTMENT EXPERIENCE OF THE FUND IS DERIVED
DIRECTLY FROM THE INVESTMENT EXPERIENCE OF THE PORTFOLIO. OF COURSE, AS WITH ANY
MUTUAL FUND, THERE IS NO ASSURANCE THAT THE FUND OR PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
This prospectus sets forth concisely the information a prospective investor
should know and should be read and retained. To learn more about the Fund, you
may obtain a copy of the Fund's current Statement of Additional Information (the
"SAI") which is incorporated by reference into this Prospectus. The SAI has been
filed with the Securities and Exchange Commission ("SEC") and is available along
with other related materials for reference on the SEC's Internet Web Site
(http://www.sec.gov) or may be obtained without charge from the Trust by writing
to Two Portland Square, Portland, Maine 04101 or by calling 1-800-290-9826.
<PAGE>
PROSPECTUS SUMMARY
This prospectus offers Investor Class shares ("Investor Shares" or "Shares") of
the Schroder International Bond Fund (the "Fund"), which is a separately
managed, non-diversified series of Schroder Capital Funds (Delaware) (the
"Trust"), an open-end, management investment company registered under the
Investment Company Act of 1940 (the "1940 Act").
Investment Adviser
The Portfolio's investment adviser is Schroder Capital Management International
Inc. ("SCMI"), 787 Seventh Avenue, New York, New York 10019. The Fund (and
indirectly its shareholders) bears a pro rata portion of the investment advisory
fee paid to SCMI by the Portfolio. See "Management of the Fund - Investment
Adviser and Portfolio Manager."
Prior to January 1, 1997, the Portfolio had no operating history. The historical
performance of another mutual fund previously managed by the Portfolio Manager
which had substantially similar investment objective, policies, limitations,
strategies and risks to those of the Fund, is presented in Appendix A.
Administrative Services
Schroder Fund Advisors Inc. ("Schroder Advisors") serves as administrator and
distributor of the Fund, and Forum Administrative Services, LLC ("Forum") serves
as the Fund's sub-administrator.
PURCHASES AND REDEMPTIONS OF SHARES. Shares may be purchased or redeemed by
mail, by bank-wire or through an investor's broker-dealer or other financial
institution. The minimum initial investment is $100,000, except that the minimum
for an Individual Retirement Account ("IRA") is $25,000. There is no minimum
amount for subsequent investments. See "Investment in the Fund -- Purchase of
Shares" and "-- Redemption of Shares."
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund declares annually and pays as a
dividend substantially all of its net investment income and realized net short-
term capital gain, and at least annually distributes any net realized long-term
capital gain and gains from foreign currency transactions. Dividends and capital
gain distributions are reinvested automatically in additional Investor Shares of
the Fund at net asset value unless the shareholder has notified the Fund in an
Account Application or otherwise in writing of the shareholder's election to
receive dividends or other distributions in cash. See "Dividends, Other
Distributions and Taxes."
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SCHRODER INTERNATIONAL BOND FUND
OBJECTIVE: High rate of total return by investing primarily in a Portfolio of
non-U.S. debt securities.
STRATEGY: Invests mainly in foreign bonds, primarily debt securities of foreign
governments, agencies and supranational organizations denominated in foreign
currencies.
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RISK CONSIDERATIONS
Alone, the Fund is not a balanced investment plan. It is intended for long-term
investors seeking investments in markets outside the U.S., who are willing to
accept the risks of foreign investing.
It is important to note that the Portfolio's investments in the securities of
issuers located in foreign countries may involve certain risks not associated
with domestic investing, such as the possible imposition of exchange controls or
other foreign governmental, laws or restrictions.
The Fund's net asset value ("NAV") is expected to vary because the market value
of the Portfolio's investments will change due to changes in the value of the
securities in which the Portfolio invests, market conditions, interest rates,
currency fluctuations, or other political or economic news. The Fund is non-
diversified, which means that it may invest a greater portion of its assets in
securities of individual issuers than diversified funds. Consequently, changes
in the market value of a single issuer could cause greater fluctuations in the
Fund's NAV than would occur in a more diversified fund. When you sell your
shares, they may be worth more or less than what you paid for them. (See
"Investment Objectives, Policies and Risk Considerations --. Risk
Considerations").
[Check Mark] UNDERSTANDING MUTUAL FUNDS
(SOME SORT OF CALL-OUT BOX SHOWING THE RISK DIFFERENTIAL AMONG MONEY MARKET,
BOND, EQUITY, ASSET-ALLOCATION FUNDS? OR SOMETHING ELSE?)
[World Map]
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FEE TABLE
Transaction and Operating Expenses. The table below shows the estimated costs
and expenses that you would incur as a holder of Investor Shares, based upon the
projected annual operating expenses for the Fund's first year. The table
includes the Fund's estimated pro rata portion of the Portfolio's operating
expenses, which are borne indirectly by the Fund's shareholders.
<TABLE>
<CAPTION>
TRANSACTION EXPENSES OPERATING EXPENSES EXAMPLES
<S> <C> <C> <C> <C> <C> <C>
SCHRODER Maximum sales NONE Management Fee ____% After 1 Year $
INTERNATIONAL charge on
BOND purchases and
FUND reinvested dividends
Deferred sales NONE 12b-1 Fee NONE After 3 Years $
charge on
redemptions
Exchange Fee NONE Other Expenses After 5 Years $
(after waivers or
reimbursements) ____%
TOTAL FUND After 10 Years $
OPERATING
EXPENSES (after
waivers or
reimbursements) ____
____%
</TABLE>
SCMI has voluntarily agreed to limit its management fee to an annual rate of
[0.00]% of the Portfolio's average daily net assets. See page ___ for further
explanation of these fees. Absent any fee waivers and expense reimbursements
Other Expenses and Total Operating Expenses of the Fund would be ____% and
____%, respectively.
Transaction expenses may be charged directly to an investor when buying, selling
or exchanging shares of the Fund. Operating expenses, which are paid out of the
Fund's assets, are factored into the Fund's share price and are not charged
directly to shareholder accounts.
EXAMPLE. The table below indicates how much you would pay in total expenses for
a $1,000 investment in the Fund, assuming (1) a 5% annual return and (2)
redemption at the end of each time period. The example is based on projected
expenses for the Fund's first year of operation, assumes the reinvestment of all
dividends and other distributions, and does not reflect the effect of taxes. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
RETURNS; ACTUAL EXPENSES OR RETURNS MAY VARY FROM THOSE SHOWN.
<PAGE>
PERFORMANCE
The Fund's performance may be quoted in advertising in terms of yield or total
return. All performance information is based on historical results and is not
intended to indicate future performance. A Fund's yield is a way of showing the
rate of income the Fund earns on its investments as a percentage of the Fund's
share price. To calculate standardized yield, a Fund takes the interest income
it earned from its investments for a 30-day period (net of expenses), divides it
by the average number of shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Fund's share price at the
end of the 30-day period. The Fund's total return shows its overall change in
value, including changes in share price and assuming all the Fund's dividends
and distributions are reinvested. A cumulative total return reflects the Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual returns tend to smooth out
variations in the Fund's returns, shareholders should recognize that they are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss. Published yield quotations
are, and total return figures may be, based on amounts actually invested in the
Fund net of sales loads that may be paid by an investor. A computation of yield
or total return that does not take into account the sales load paid by an
investor will be higher than a computation based on the public offering price of
shares purchased that take into account payment of the sales load.
The Fund's advertisements may reference ratings and rankings among similar
mutual funds by independent evaluators such as Morningstar, Inc., Lipper
Analytical Services, Inc. and IBC/Donoghue, Inc. The comparative material found
in the Fund's advertisements, sales literature or reports to shareholders may
contain performance ratings. This material is not to be considered
representative or indicative of future performance. All performance information
for the Fund is calculated on a class basis. In addition, the Fund may use a
benchmark securities index as a measure of the Fund's performance. These indices
are not used in the management of the Fund but rather are standards by which the
Adviser and shareholders may compare the performance of the Fund to an unmanaged
composite of securities with similar, but not identical, characteristics as the
Fund. The Fund may from time to time advertise a comparison of their performance
against any of these or other indices.
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The Fund is designed for investors seeking a high rate of total return by
investing mainly in debt securities and debt-related investments, which may be
domestic or foreign, and may be denominated in foreign or U.S. currency. The
Fund has a fundamental investment policy that allows it to invest primarily in
the Portfolio which in turn, invests primarily in a portfolio of non-U.S. debt
securities. All other investment policies of the Fund and the Portfolio are
substantially identical. There can be no assurance that the Fund or Portfolio
will achieve its investment objective.
5
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Although the following information describes the investment policies of the
Portfolio and the responsibilities of Schroder Core II's Board of Trustees (the
"Schroder Core II Board"), it applies equally to the Fund and the Trust's Board
of Trustees (the "Board"). Additional information concerning the investment
policies of the Fund and the Portfolio is contained in the SAI.
INVESTMENT OBJECTIVE
The investment objective of the Portfolio is to seek to provide a high rate of
total return by investing primarily in a portfolio of non-U.S. debt securities.
There can be no assurance that the Portfolio will achieve its investment
objective. The investment objective of the Portfolio may not be changed without
approval of the holders of a majority of the outstanding voting interests
(defined in the same manner as the phrase "vote of a majority of the outstanding
voting securities" is defined in the 1940 Act) of the Portfolio.
-----------------
INVESTMENT POLICIES
The Portfolio will seek to achieve its investment objective by investing in debt
securities and debt-related investments, which may be domestic or foreign, and
may be denominated in foreign or U.S. currency.
The Portfolio will, under normal market conditions, invest at least 65% of its
total assets in foreign bonds, primarily debt securities of foreign governments,
agencies and supranational organizations denominated in foreign currencies.
These could have fixed, variable, floating or inverse floating rates of
interest. The Portfolio may also purchase debt securities of corporate issuers.
Some of these securities may be privately issued and/or convertible into common
stock or they may be traded together with warrants for the purchase of common
stock.
The Portfolio may invest in a variety of countries, and under ordinary
circumstances will invest in a minimum of 5 countries other than the U.S. This
includes countries with established economies as well as emerging market
countries, including, but not limited to, those in Latin America and other newly
industrialized countries, such as South Korea and Taiwan, that the investment
adviser believes present favorable opportunities.
The Portfolio may invest up to 10% of its net assets in lower-rated debt
securities, including short-term instruments. Lower-rated securities are rated
below BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service
("Moodys"). (See "Appendix A - Description of Securities Ratings.")
In order to enhance returns, manage risk more efficiently, reduce trading costs,
and help protect against changes in securities prices and foreign exchange
rates, the Portfolio may invest in currency on a spot or forward basis,
securities or securities index options, foreign currency
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<PAGE>
options, futures contracts and related options on futures contracts, and may
enter into swap agreements. Additionally, the Portfolio may sell interest rate
and bond index futures contracts, options on interest rate and bond index
futures contracts and options and futures on debt securities, in each case for
hedging purposes only.
The Portfolio may also (i) borrow up to 15% of its total assets, (ii) lend its
securities to brokers, dealers and other financial institutions to earn income,
(iii) buy securities on a when-issued, firm, or standby commitment basis (whose
market value may change prior to their delivery to the Portfolio), (iv) invest
in repurchase agreements and enter into reverse repurchase agreements (which can
create leverage and increase the Portfolio's investment risk), and (v) invest in
loan participation interests (which involve certain risks, including credit and
liquidity risks). (See "Loan Participation Interests" for further details.).
INVESTMENT RESTRICTIONS
The investment objective and the investment policies of the Portfolio that are
designated as fundamental may not be changed without approval of the holders of
a majority of the outstanding voting securities of the Portfolio. A majority of
outstanding voting securities means the lesser of (1) 67% of the shares present
or represented at a shareholder meeting at which the holders of more than 50% of
the outstanding shares are present or represented, or (ii) more than 50% of
outstanding shares. Unless otherwise indicated, all investment policies of the
Portfolio are not fundamental and may be changed by the Schroder Core II Board
without approval of the interest holders of the Portfolio. Likewise, non-
fundamental investment policies of the Fund may be changed by the Board without
approval of the Fund's shareholders.
NON-DIVERSIFICATION
The Fund is classified as a "non-diversified" investment company under the 1940
Act. In contrast to a "diversified" company, a non-diversified company may
invest more than 5% of its total assets in the securities of any one issuer.
However, so that the Fund may continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), the Portfolio will limit its investments so that at the close of
each quarter of the taxable year, (i) not more than 25% of the market value of
the Portfolio's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets not
more than 5% will be invested in the securities of a single issuer and the
Portfolio will not own more than 10% of the outstanding voting securities of a
single issuer.
SECURITIES, INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following pages contain additional information about the securities in which
the Portfolio may invest, strategies SCMI may employ in pursuit of the
Portfolio's objective, and a summary of related risks. A complete listing of the
Portfolio's investment restrictions and more detailed
7
<PAGE>
information about the Portfolio's investments is contained in the SAI. Policies
and limitations are considered at the time of purchase.
SCMI may not buy any of these instruments or use these techniques unless it
believes that they are consistent with the Portfolio's objective. Current
holdings and recent investment strategies are described in the Fund's financial
reports which are sent to shareholders twice a year. For a free financial report
or SAI, please call 1-800-290-9826.
DESCRIPTION OF INVESTMENT PRACTICES AND INVESTMENTS
The investment adviser considers factors such as prospects for currency exchange
and interest rates, inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions, and the
quality of individual issuers. The investment adviser will also determine, using
good faith judgment, (1) country allocation, (2) currency exposure (asset
allocation across currencies) and (3) diversified security holdings within each
market.
Securities acquired by the Portfolio may be denominated in multinational
currency units such as the European Currency Unit ("ECU"). Securities of issuers
within a given country may be denominated in the currency of another country.
The investment adviser believes that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between securities denominated in different currencies and/or changes in value
between currencies. Moreover, the investment adviser believes active currency
management can be employed as an overall portfolio risk management tool. Foreign
currency management can also provide overall portfolio risk diversification.
Generally, the Portfolio's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Portfolio may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales.
FIXED INCOME SECURITIES AND THEIR CHARACTERISTICS. Investments by the Portfolio
in fixed income securities, including money market instruments, are subject to
risk even if all fixed income securities in the Portfolio's investment portfolio
are paid in full at maturity. All fixed income securities, including U.S.
Government Securities, can change in value when there is a change in interest
rates or the issuer's actual or perceived creditworthiness or ability to meet
its obligations.
The market value of the interest-bearing debt securities held by the Portfolio
will be affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. In other words, an increase
in interest rates produces a decrease in market value. Moreover, the longer the
8
<PAGE>
remaining maturity of a security, the greater will be the effect of interest
rate changes on the market value of that security. Changes in the ability of an
issuer to make payments of interest and principal and changes in the market's
perception of an issuer's creditworthiness will also affect the market value of
the debt securities of that issuer. The possibility exists, therefore, that, the
ability of any issuer to pay, when due, the principal of and interest on its
debt securities may become impaired.
RATING MATTERS. The Portfolio may purchase unrated securities if SCMI determines
the security to be of comparable quality to a rated security that the Portfolio
may purchase. Unrated securities may not be as actively traded as rated
securities. The Portfolio may retain a security whose rating has been lowered if
SCMI determines that retaining the security is in the best interests of the
Portfolio.
The Portfolio's investments are subject to "credit risk" relating to the
financial condition of the issuers of the securities that the Portfolio holds. A
further description of the rating categories of certain nationally recognized
statistical rating organizations (each a "NRSRO") is contained in the SAI. All
these ratings are generally considered to be investment grade ratings, although
Moody's indicates that securities with long-term ratings of Baa have speculative
characteristics, and issuers whose securities are rated in the lowest investment
grade are more likely to have a weakened capacity to make principal and interest
payments due to changes in economic conditions or other circumstances than is
the case with issues of higher-grade bonds.
For more information about the investments described in this section, please see
the SAI.
ARBITRAGE
The Portfolio may sell a security in one market and simultaneously purchase the
same security in another market, or it may buy a security in one market and
simultaneously sell it in another market, in order to take advantage of
differences in the price of the security in the different markets. The Portfolio
does not actively engage in arbitrage. Such transactions may be entered into
only with respect to debt securities and will occur only in a dealer's market
where the buying and selling dealers involved confirm their prices to the
Portfolio at the time of the transaction, thus eliminating any risk to the
assets of the Portfolio.
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
The Portfolio may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and in certificates of deposit, time deposits, and other short-term obligations
issued by savings and loan associations ("S&Ls"). Certificates of deposit are
receipts from a bank or an S&L for funds deposited for a specified period of
time at a specified rate of return. Time deposits in banks or S&Ls are generally
similar to certificates of deposit, but are uncertificated. Bankers' acceptances
are time drafts drawn on commercial banks by borrowers, usually in connection
with international commercial transactions. The Portfolio may not invest in time
deposits maturing in more than seven days
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<PAGE>
which are subject to withdrawal penalties. The Portfolio will limit its
investment in time deposits for which there is a penalty for early withdrawal to
10% of its net assets.
BORROWING
The Portfolio may borrow up to a limit of 15% of its total assets from a bank,
but only for temporary or emergency purposes. Borrowing may exaggerate the
effect on the Portfolio's net asset value of any increase or decrease in the
value of the Portfolio's portfolio securities. Money borrowed will be subject to
interest costs (which may include commitment fees and/or the cost of maintaining
minimum average balances). The Portfolio will repay any money borrowed from a
bank in excess of 5% of its total assets prior to purchasing additional
securities. In addition, the Portfolio may invest up to one-third of its total
assets in reverse repurchase agreements subject to the limitations set forth
under "Repurchase Agreements and Reverse Repurchase Agreements".
BRADY BONDS
The Portfolio may invest a portion of its assets in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructuring
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the dollar) and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered U.S. Government securities. In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
There can be no assurance that Brady Bonds acquired by the Portfolio will not be
subject to restructuring arrangements or to requests for new credit, which may
cause the Portfolio to suffer a loss of interest or principal on any of its
holdings. (For further information see "Brady Bonds," in the Statement of
Additional Information.)
COMMERCIAL PAPER
The Portfolio may invest in commercial paper. The Portfolio will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Portfolio's investment
adviser determines that the commercial paper is of comparable quality.
Commercial paper represents short-term unsecured promissory notes issued by
banks or bank holding companies, corporations and finance companies. (See
"Appendix A--Description of Securities Ratings.").
CORPORATE DEBT SECURITIES
The Portfolio's investments in U.S. dollar- or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds,
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debentures, notes and other similar corporate debt instruments) which meet the
credit quality and maturity criteria set forth for the Portfolio. The rate of
return or return of principal on some debt obligations may be linked to indexes
or stock prices or indexed to the level of exchange rates between the U.S.
dollar and foreign currency or currencies.
Corporate debt securities with a rating lower than BBB by S&P, and corporate
debt securities rated Baa or lower by Moody's have speculative characteristics,
and changes in economic conditions or individual corporate developments are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of high grade bonds. The Portfolio may invest up to 10% of its
net assets in debt securities which are rated below investment grade. (See "High
Yield Securities ("Junk Bonds").
FIRM AND STANDBY COMMITMENT AGREEMENTS AND
WHEN-ISSUED SECURITIES
New issues of certain debt securities are often offered on a when-issued basis.
That is, the payment obligation and the interest rate are fixed at the time the
buyer enters into the commitment, but delivery and payment for the securities
normally take place after the date of the commitment to purchase. Firm and
standby commitment agreements call for the purchase of securities at an agreed-
upon price on a specified future date. The transactions are entered into in
order to secure what is considered to be an advantageous price and yield to the
Portfolio and not for purposes of leveraging the Portfolio's assets. However,
the Portfolio will not accrue any income on these securities prior to delivery.
The value of when-issued securities and firm and standby commitment agreements
may vary prior to and after delivery depending on market conditions and changes
in interest rate levels. There is a risk that a party with whom the Portfolio
has entered into such transactions will not perform its commitment, which could
result in a gain or loss to the Portfolio.
FLOATING AND VARIABLE RATE SECURITIES AND
INVERSE FLOATERS
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Portfolio may, to the extent permitted by law, invest in floating rate debt
instruments ("floaters"). The interest rate on a floater is a variable rate tied
to another interest rate, such as a money market index or Treasury bill rate.
The Portfolio may, to the extent permitted by law, invest in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude
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that exceeds the magnitude of the change in the index rate of interest. The
higher degree of leverage inherent in inverse floaters is associated with
greater volatility in their market values. Accordingly, the duration of an
inverse floater may exceed its stated final maturity. Certain inverse floaters
may be deemed to be illiquid securities.
FOREIGN CURRENCY TRANSACTIONS
Forward foreign currency exchange contracts ("forward contracts") are intended
to minimize the risk of loss to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. A forward contract may be used, for example, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security.
Such contracts do not eliminate fluctuations in the underlying prices of
securities held by the Portfolio. Although such contracts tend to minimize the
risk of loss due to a decline in the value of a currency that has been sold
forward, and the risk of loss due to an increase in the value of a currency that
has been purchased forward at the same time they tend to limit any potential
gain that might be realized should the value of such currency increase.
Successful use of forward contracts depends on the investment adviser's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Portfolio's exposure to currency exchange rate activity and could result in
losses to the Portfolio if currencies do not perform as the investment adviser
anticipates. The Portfolio may also incur significant costs when converting
assets from one currency to another.
FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility, the
Portfolio may invest in instruments that have the investment characteristics of
particular securities, securities indexes, futures contracts or currencies. Such
instruments may take a variety of forms, such as debt instruments with interest
or principal payments determined by reference to the value of a currency or
commodity at a future point in time. A foreign index may be based upon the
exchange rate of a particular currency or currencies, the differential between
two currencies, the level of interest rates in a particular country or
countries, or the differential in interest rates between particular countries.
In the case of foreign index-linked instruments linking the interest components
to a foreign index, the amount of interest payable will adjust periodically in
response to changes in the level of the foreign index during the term of the
foreign index-linked instrument. The risks of such investments would reflect the
risks of investing in the index or other instrument, the performance of which
determines the return for the instrument. Tax considerations may limit the
Portfolio's ability to invest in foreign index-linked instruments.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Portfolio may enter into futures contracts and related options, which may be
used for any legal purpose including to reduce trading costs. An interest rate
or stock index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. There are several risks associated with the use of
futures and related options for hedging purposes. There can be no assurance that
a liquid market will exist at a time when the Portfolio seeks to close out a
futures contract or a futures option position. Most futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures contract prices
during a single day: once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the securities or
currencies being hedged. An incorrect correlation could result in a loss on both
the hedged securities or currencies and the hedging vehicle so that the
Portfolio's return might have been better had hedging not been attempted. Use of
options on securities, options on stock or bond indices, and warrants are
subject to similar risk considerations (See "Options on Securities and Options
on Stock or Bond Indices" below.)
GOVERNMENT SECURITIES
Government securities are obligations of, or guaranteed by, the U.S. government
or its agencies or instrumentalities. Some U.S. government securities, such as
Treasury bills, notes and bonds, are supported by the full faith and credit of
the United States; others, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
HIGH YIELD SECURITIES
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade". There is more price volatility, greater risk of
losing principal and interest, a greater possibility of the issuer going
bankrupt, and other additional risks. These securities are considered
speculative.
The Portfolio may invest up to 10% of its net assets in debt securities,
including short-term instruments, that are rated below investment grade (i.e.,
below BBB by S&P or Baa by Moody's)
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or, if not rated, are deemed to be of equivalent quality by the investment
adviser. The lower the ratings of such securities, the greater their risks.
Moody's considers bonds it rates Baa to have speculative elements as well as
investment grade characteristics. The Portfolio may invest in securities which
are rated D by S&P or, if unrated, are of equivalent quality. Securities rated D
may be in default with respect to payment of principal or interest. (See
"Appendix A--Description of Securities Ratings.")
Investors should consider and be willing to accept the risks associated with
high yield securities before investing. Investment in such bonds involves
special risks in addition to the risks associated with investments in higher
rated debt securities. High yield bonds may be regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investment in high yield bonds, be more dependent upon such credit analysis than
would be the case if the Portfolio were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, the Portfolio may incur additional expenses to seek recovery. In the
case of high yield bonds structured as zero coupon or payment-in-kind
securities, the market prices of such securities are affected to a greater
extent by interest rate changes and, therefore, tend to be more volatile than
securities which pay interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which the Portfolio could sell a high
yield bond, and could adversely affect and cause large fluctuations in the daily
net asset value of the Portfolio's shares.
The use of credit ratings as the sole method for evaluating high yield bonds
also involves certain risks. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of high yield bonds.
Also, credit rating agencies may fail to change credit ratings on a timely basis
to reflect subsequent events.
ILLIQUID AND RESTRICTED SECURITIES
As a non-fundamental policy, the Portfolio will not purchase or otherwise
acquire any security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market or because of legal or contractual
restrictions on resale ("restricted securities"). There may be undesirable
delays in selling illiquid securities at prices representing their fair value.
This policy includes over-the-counter options held by the Portfolio and the "in
the money" portion of the assets used
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to cover such options. The limitation on investing in restricted securities does
not include securities that may not be resold to the general public but may be
resold to qualified institutional purchasers pursuant to Rule 144A under the
Securities Act of 1933, as amended. If SCMI determines that a "Rule 144A
security" is liquid pursuant to guidelines adopted by the Board, the security
will not be 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 Rule 144A
security, that security may become illiquid, which could affect the Portfolio's
liquidity. (See "Investment Policies - Illiquid and Restricted Securities" in
the SAI for further information.)
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its investment securities to brokers, dealers and
financial institutions for the purpose of realizing additional income. The total
market value of securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. The risk in lending portfolio securities, as with
other extensions of credit, is the possible loss of rights in the collateral
should the borrower fail financially. In determining whether to lend securities,
the Portfolio's investment adviser will consider all relevant facts and
circumstances, including the creditworthiness of the borrower.
LOAN PARTICIPATION INTERESTS
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank and sets forth the rights and duties of
the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants that must be kept by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. The Portfolio may incur additional credit risk,
however, when it is in the position of participant rather than a co-lender
because the Portfolio must assume the risk of insolvency of the co-lender from
which the participation interest was acquired and that of any person
interpositioned between the Portfolio and the co-lender.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The value of some mortgage-related or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to use these instruments successfully may depend in part upon the
ability of an investment adviser to forecast interest rates and other economic
factors. While principal and interest payments on some mortgage-related
securities may be guaranteed by
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the U.S. government, government agencies or other guarantors, the market value
of such securities is not guaranteed.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interest in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans that underlie the securities (net of fees paid to the
issuer or guarantor of the securities). Early repayment of principal on mortgage
pass-through securities (arising from prepayments of principal due to sale of
the underlying property, refinancing, or foreclosure (net of fees and costs
which may be incurred)) may expose the Portfolio to a lower rate of return upon
reinvestment of principal. Also, if a security subject to repayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"). CMOs are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and pre-paid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). CMOs
are structured into multiple classes, with each class bearing a different stated
maturity. Monthly payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes receive principal only after the first class has been
retired. REMICs are similar to CMOs and are fixed pools of mortgages with
multiple classes of interests held by investors. The cash flow generated by the
mortgage assets underlying a series of CMOs is applied first to make required
payments of principal and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The residual interest in a CMO structure
generally represents the interest in any excess cash flow remaining after making
the foregoing payments. The Portfolio limits its investment in CMO residuals to
less than 5% of its net assets.
OTHER MORTGAGE-RELATED SECURITIES. The Portfolio's investment adviser expects
that governmental, government-related or private entities may create mortgage
loan pools and other mortgage-related securities offering mortgage pass-through
and mortgage-collateralized investments in addition to those described above. As
new types of mortgage-related securities are developed and offered to investors,
the Portfolio's investment adviser will, consistent with the Portfolio's
investment objective, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
OTHER ASSET-BACKED SECURITIES. Other asset-backed securities (unrelated to
mortgage loans) have been offered to investors, such as "CARs" ("Certificates
for Automobile Receivables"). CARs represent undivided fractional interests in a
trust whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARs are "passed-through" monthly to
certificate holders,
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and are guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution unaffiliated with the trustee
or originator of the trust. Underlying sales contracts are subject to
prepayment, which may reduce the overall return to certificate holders. If the
letter of credit is exhausted, certificate holders may also experience delays in
payment or losses on CARs, if the full amounts due on underlying sales contracts
are not realized by the trust because of unanticipated legal or administrative
costs of enforcing the contracts, or because of depreciation, damage or loss of
the vehicles securing the contracts, or other factors. If consistent with its
investment objective and policies, the Portfolio may invest in CARs and in other
asset-backed securities that may be developed in the future.
The Portfolio will invest only in mortgage-related (or other asset-backed)
securities either (i) issued by U.S. government-sponsored corporations
(currently GNMA, FHLMC and FNMA), or (ii) rated Baa or better by Moody's or BBB
or better by S&P or, if not rated, of comparable investment quality as
determined by the Portfolio's investment adviser.
OPTIONS ON FOREIGN CURRENCIES
The Portfolio may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. The Portfolio may also use foreign currency options
to protect against potential losses in positions denominated in one foreign
currency against another foreign currency in which the Portfolio's assets are or
may be invested. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations, although, in the event of
rate movements adverse to the Portfolio's position, the Portfolio may forfeit
the entire amount of the premium plus related transaction costs. Options on
foreign currencies to be written or purchased by a Portfolio will be traded on
U.S. and foreign exchanges or over-the-counter.
OPTIONS ON SECURITIES AND OPTIONS ON STOCK OR
BOND INDICES
A put option is a short-term contract that gives the purchaser of the put
option, in return for a premium, the right to sell the underlying security to
the seller of the option at a specified price during the term of the option. A
call option is a short-term contract that gives the purchaser the right to buy
from the seller of the option the underlying security at a specified price
during the term of the option. A call option on a stock or bond index gives the
purchaser of the option, in return for the premium paid, the right to receive
from the seller cash equal to the difference between the closing price of the
index and the exercise price of the option. The Portfolio will only write
"covered" call options and "secured" put options. A "covered" call option means
generally that so long as the Portfolio is obligated as the writer of a call
option, the Portfolio will either own the underlying securities subject to the
call, or hold a call at the same exercise price, for the same exercise period,
and on the same securities as the call written. A "secured" put
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option means generally that so long as the Portfolio is obligated as the writer
of the put option, the Portfolio will maintain liquid assets with a value equal
to the exercise price in a segregated account, or hold a put on the same
underlying security at an equal or greater exercise price. Options in which the
Portfolio may invest may be traded on exchanges and in the over-the-counter
market.
REPURCHASE AGREEMENTS AND
REVERSE REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements. A repurchase agreement is a
means of investing monies for a short period. In a repurchase agreement, a
seller -- a U.S. bank or recognized broker-dealer -- sells securities to the
Portfolio and agrees to repurchase the securities at the Portfolio's cost plus
interest within a specified period (normally one day). In these transactions,
the values of the underlying securities purchased by the Portfolio are monitored
at all times by SCMI to ensure that the total value of the securities equals or
exceeds the value of the repurchase agreement, and the Portfolio 's custodian
bank holds the securities until they are repurchased. In the event of default by
the seller under the repurchase agreement, the Portfolio may have difficulties
in exercising its rights to the underlying securities and may incur costs and
experience time delays in disposing of them. To evaluate potential risks, SCMI
reviews the creditworthiness of those banks and dealers with which the Portfolio
enters into repurchase agreements.
The Portfolio may enter into reverse repurchase agreements with banks or broker-
dealers, which involves the sale of a security by the Portfolio and its
agreement to repurchase the instrument at a specified time and price. The
Portfolio will maintain a segregated account consisting of cash, U.S. government
securities, foreign government securities provided they are of high liquidity
and quality, or other high-grade debt obligations maturing not later than the
expiration of the reverse repurchase agreement, to cover its obligations under
reverse repurchase agreements. The Portfolio will limit its investments in
reverse repurchase agreements and other borrowing to no more than one-third of
its total assets. The use of reverse repurchase agreements by the Portfolio
creates leverage that increases the Portfolio's investment risk. If the income
and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the cost of the agreements, the Portfolio's earnings or net
asset value will increase faster than otherwise would be the case; conversely,
if the income and gains fail to exceed the costs, earnings or net asset value
would decline faster than otherwise would be the case.
RESTRICTED SECURITIES
To the extent that it invests in restricted securities, the Portfolio may be
exposed to additional risks. "Restricted" securities are those securities that
have not been registered under the Securities Act of 1933. Because they are
unregistered, only a limited number of investors are qualified to invest in such
securities, which imposes the risk that the Portfolio investing in restricted
securities may not be able to easily dispose of them. In disposing of restricted
securities the Portfolio may incur additional transaction costs in finding a
buyer or, in an extreme case, registering the security.
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SWAP AGREEMENTS
The Portfolio may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Portfolio than if the Portfolio had invested directly in
an instrument that yielded that desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount" (i.e., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, in a
particular foreign currency or in a "basket" of securities representing a
particular index). Commonly used swap agreements include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
Whether the Portfolio's use of swap agreements will be successful in furthering
its investment objective will depend upon the investment adviser's ability to
predict whether certain types of investments will produce greater returns than
other investments. Because they are two-party contracts and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid.
Moreover, the Portfolio bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. An investment adviser will cause the Portfolio to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Portfolio's
repurchase agreement guidelines. Certain restrictions imposed on the Portfolio
by the Internal Revenue Code may limit the Portfolio's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market and the laws
relating to swaps, including potential government regulation, could adversely
affect the Portfolio's ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, to enter into swap agreements or
could have tax consequences. (See "Tax Information" in the Statement of
Additional Information for information regarding the tax considerations relating
to swap agreements.)
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes, the Portfolio may invest without limitation in
(or enter into repurchase agreements maturing in seven days or less with U.S.
banks and broker-dealers with respect to) short-term debt securities, including
commercial paper, U.S. Treasury bills, other
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short-term U.S. Government securities, certificates of deposit and bankers'
acceptances of U.S. banks. The Portfolio also may hold cash and time deposits in
U.S. banks. In transactions involving "repurchase agreements," the Portfolio
purchases securities from a bank or broker-dealer who agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time. The
securities purchased by the Portfolio have a total value in excess of the value
of the repurchase agreement and are held by the Portfolio's custodian bank until
repurchased. See "Investment Policies" in Part B for further information about
all these securities.
Zero Coupon Bonds
Zero coupon bonds are debt obligations issued without any requirement for the
periodic payment of interest. Zero coupon bonds are issued at a significant
discount from the face value. The discount approximates the total amount of
interest the bonds would accrue and compound over the period until maturity at a
rate of interest reflecting the market rate at the time of issuance. Cash to pay
dividends representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Portfolio interests and from loan proceeds.
Because interest on zero coupon obligations is not paid to the Portfolio on a
current basis but is in effect compounded, the value of the securities of this
type is subject to greater fluctuations in response to changing interest rates
than the value of debt obligations that distribute income regularly. Zero coupon
bonds tend to be subject to greater market risk than interest-paying securities
of similar maturities. The discount represents income a portion of which the
Portfolio must accrue and distribute every year even though the Portfolio
receives no payment on the investment in that year.
RISK CONSIDERATIONS
Generally, when interest rates fall, the market prices of bonds rise. When rates
rise, the market prices of bonds generally fall.
Alone, the Fund is not a balanced investment plan. It is intended for long-term
investors who seek investments in markets outside the U.S. and are willing to
accept the risks of foreign investing.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer and other risks,
which is why these securities are considered speculative. (See "High Yield
Securities, for additional risks.) Investments in foreign securities could be
more volatile and more difficult to sell than U.S. investments, and involve
additional risks. (For more on risks of investing in foreign securities, see
"Description of Investment Practices and Investments--"Foreign Currency
Transactions" and "Foreign Securities.")
There are certain risks associated with investment securities with floating or
inverse floating rates of interest. (See "Description of Investment Practices
and Investments"--"Floating and Variable Rate Securities and Inverse Floaters.")
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Because the market value of the Portfolio's investments will change, the net
asset value of the Portfolio will also change. Rapid changes in interest rates
can affect bond prices significantly. The value of the securities in the
Portfolio (and, therefore, its NAV) will fluctuate in response to factors such
as (i) conditions in the securities markets, (ii) business success of the
security's issuer, (iii) creditworthiness of the issuer of the security, (iv)
changing interest rates, (v) average maturity of the Portfolio's investments,
(vi) real or perceived economic and competitive industry conditions, (vii)
foreign currency exchange rates, and (viii) other factors.
In unusual or adverse market conditions, for temporary defensive purposes, the
Portfolio may invest all or a portion of its assets in cash or cash equivalent
short-term obligations such as obligations issued or guaranteed by the U.S.
Government, any of its agencies or instrumentalities, or by any of the States;
or in money market funds, repurchase and reverse repurchase agreements, time
deposits, certificates of deposit, bankers' acceptances and commercial paper.
The Portfolio's investments in the securities of issuers located in foreign
countries may involve certain risks, such as the possible imposition of exchange
controls or other foreign governments, laws or restrictions. Because the
Portfolio may invest up to 100% of its total assets in instruments denominated
in currencies other than U.S. dollars, the Portfolio is subject to the risk that
fluctuations in the exchanges rates between the U.S. dollar and foreign
currencies may negatively affect its investments. In addition, income from
foreign securities will be received and realized in foreign currencies, and the
Portfolio is required to compute and distribute income in U.S. dollars.
Accordingly, a decline in the value of a particular foreign currency against the
U.S. dollar will reduce the dollars available to make a distribution. Similarly,
if the exchange rate declines between the time after the Portfolio's income has
been earned and computed in U.S. dollars and the time it is paid, or between the
time the Portfolio incurs expenses in U.S. dollars and the time such expenses
are paid, the Portfolio may have to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. See "Considerations and Risks of
Investments in Foreign Securities" below.
CONSIDERATIONS AND RISKS OF INVESTMENTS IN FOREIGN SECURITIES.
General. Investments in foreign securities involve certain risks not associated
with domestic investing, including fluctuations in foreign exchange rates,
uncertain political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. Because
international investments generally involve risks in addition to those risks
associated with investments in the U.S., the Fund should be considered only as a
vehicle for international diversification and not as a complete investment
program.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as economic growth rates, rates of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments positions.
Certain foreign investments may also be subject to foreign withholding taxes,
thereby reducing the income available for distribution to the Portfolio's
interestholders. Additionally, commission rates payable on foreign portfolio
transactions are generally higher than in the U.S.; accounting, auditing and
financial reporting standards differ
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from those in the U.S. and this may mean that less information about foreign
companies may be available than is generally available about issuers of
comparable securities in the U.S.; and foreign securities often trade less
frequently and with less volume than U.S. securities and consequently may
exhibit greater price volatility.
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country. To the extent that it invests in
issuers located in one country, the Portfolio is susceptible to factors
adversely affecting that country, including the political and economic
developments and foreign exchange rate fluctuations discussed above. As a result
of investing substantially in one country, the value of the Portfolio's assets
may fluctuate more widely than the value of shares of a comparable fund with a
lesser degree of geographic concentration.
FINANCIAL INFORMATION AND STANDARDS AND REGULATION OF ISSUERS. Issuers of
securities in foreign jurisdictions are generally not subject to the same degree
of regulation as are U.S. issuers with respect to such matters as insider
trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. Foreign companies may not be
subject to uniform accounting, auditing and financial reporting standards.
Often, available information about issuers and their securities is less
extensive in foreign markets, particularly emerging market countries, than in
the United States. In addition, laws in foreign countries governing business
organizations, bankruptcy and insolvency may provide less protection to security
holders such as the Portfolio than that provided by U.S. laws.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio will invest in
non-U.S. dollar denominated securities, changes in foreign currency exchange
rates will affect the value of the Portfolio's investments. A decline against
the dollar in the value of currencies in which the Portfolio's investments are
denominated will result in a corresponding decline in the dollar value of its
assets. This risk tends to be heightened in the case of investing in certain
emerging market countries. For example, some currencies of emerging market
countries have experienced repeated devaluations relative to the U.S. dollar,
and major adjustments have periodically been made in certain of such currencies.
Some emerging market countries may also have managed currencies that do not
float freely against the dollar. Exchange rates are influenced generally by the
forces of supply and demand in the foreign currency markets and by numerous
other political and economic events occurring outside the United States, many of
which may be difficult, if not impossible, to predict.
The Portfolio may enter into foreign currency forward contracts to purchase or
sell foreign currencies in anticipation of its currency requirements and to
protect against possible adverse movements in foreign exchange rates. Although
such contracts may reduce the risk of loss to the Portfolio due to a decline in
the value of the currency sold, they also limit any possible gain that might
result should the value of such currency rise. See "Foreign Currency
Transactions, "Futures, Options on Futures Contracts" and "Options on Foreign
Currencies" below.
RISKS OF EMERGING MARKETS. In any emerging market country, there is the
possibility of expropriation of assets, confiscatory taxation, foreign exchange
controls, foreign investment
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controls on daily stock market movements, default in foreign government
securities, political or social instability or diplomatic developments, all of
which could affect investments in those countries. The economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade.
Certain emerging market countries may restrict investment by foreign entities.
For example, some of these countries may limit the size of foreign investment in
certain issuers, require prior government approval of foreign investment, impose
additional tax on foreign investors or limit foreign investors to specific
classes of securities of an issuer that have less advantageous rights (with
regard to price or convertibility, for example) than classes available to
domiciliaries of the country. These restrictions or controls may at times limit
or preclude investment in certain securities and may increase the costs and
expenses of the Portfolio.
Emerging markets generally present a greater risk of imposition of substantial
limitations to a foreign investor's ability to repatriate investment income,
capital or the proceeds of sales of securities. In the event of expropriation,
nationalization or other confiscation, the Portfolio could lose its entire
investment in the country involved.
Several emerging market countries have experienced substantial, and in some
periods extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may have very negative effects on the economies
and securities markets of certain emerging market countries. Further, inflation
accounting rules in some emerging market countries require, for companies that
keep accounting records in the local currency, that certain assets and
liabilities be restated on the Trust's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain emerging market companies.
MANAGEMENT OF THE FUND
BOARDS OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Board. The business and affairs of the Portfolio are managed under the direction
of the Schroder Core II Board. The Trustees of both the Trust and Schroder Core
II (collectively the "Trusts") are Peter E. Guernsey, John I. Howell, Clarence
F. Michalis, Hermann C. Schwab and Mark J. Smith. Additional information
regarding the Trustees and executive officers of the Trust, as well as Schroder
Core II's trustees and executive officers, may be found in the SAI under the
heading "Management, Trustees and Officers."
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INVESTMENT ADVISER AND PORTFOLIO MANAGER
SCMI serves as investment adviser to the Portfolio. SCMI manages the Portfolio
and continuously reviews, supervises and administers the Portfolio's
investments. In this regard, SCMI is responsible for making decisions relating
to the Portfolio's investments and placing purchase and sale orders regarding
such investments with brokers or dealers selected by it in its discretion. For
its services with respect to the Portfolio, the Investment Advisory Agreement
between SCMI and the Trust provides that SCMI will receive a monthly advisory
fee at the annual rate of 0.50% of the Portfolio's average daily net assets,
which the Fund indirectly bears through investment in the Portfolio. SCMI has
agreed , however, to limit its fee to an annual rate of 0.00% of the Portfolio's
average daily net assets. Such fee limitation arrangement shall remain in effect
until its elimination is approved by the Board of Trustees. The Fund bears no
separate investment advisory fee directly.
SCMI is a wholly-owned U.S. subsidiary of Schroders Incorporated, the wholly-
owned U.S. holding company subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large world-wide group of banks and financial
services companies (referred to as the "Schroder Group"), with associated
companies and branch and representative offices located in eighteen countries
world-wide. The Schroder Group specializes in providing investment management
services.
Mr. Michael Perelstein is primarily responsible for the day-to-day management of
the Portfolio's investment portfolio with the assistance of Mr. Mark Astley and
an investment committee. Mr. Perelstein has been a Senior Vice President of SCMI
since January 2, 1997. Prior thereto, Mr. Perelstein was a Managing Director at
MacKay-Shields. Mr. Perelstein has more than twelve years of international and
global investment experience.
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[Check Mark] SCHRODER GROUP FACTS
[World Map]
Schroder Group offers a broad selection of mutual funds from around the world.
- - Number of mutual funds: over ______
- - Assets in mutual funds: over $ 130 billion as of October 31, 1996.
- - Number of shareholder accounts: over ______
- - Number of investment analysts and portfolio managers: over ______
ADMINISTRATIVE SERVICES
On behalf of the Fund, the Trust has entered into an administrative services
contract with Schroder Advisors, 787 Seventh Avenue, 34th Floor, New York, New
York 10019. On behalf of the Portfolio, the Trust has also entered into a sub-
administration agreement with Forum, Two Portland Square, Portland, Maine 04101.
Pursuant to these agreements, Schroder Advisors and Forum provide certain
management and administrative services necessary for the Fund's operations,
other than the investment management and administrative services provided to the
Portfolio by SCMI. Schroder Advisors is compensated at the annual rate of 0.10%
of the Fund's average daily net assets. Forum is compensated at the annual rate
of 0.075% of the Fund's average daily net assets.
Schroder Advisors and Forum provide similar services to the Portfolio, for which
the Portfolio pays Schroder Advisors at the annual rate of 0.15% of the
Portfolio's average daily net assets and pays Forum at the annual rate of 0.075%
of the Portfolio's average daily net assets.
SERVICE ORGANIZATIONS
The Glass-Steagall Act and other applicable laws and regulations provide that
banks may not engage in the business of underwriting, selling or distributing
securities. There is currently no precedent prohibiting banks from performing
administrative and shareholder servicing functions.
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However, judicial or administrative decisions or interpretations of such laws,
as well as changes in either Federal or state regulations relating to the
permissible activities of banks and their subsidiaries or affiliates, could
prevent a bank from continuing to perform all or part of its servicing
activities. If a bank were prohibited from so acting, its shareholder clients
would be permitted to remain shareholders of the Fund and alternative means for
continuing the servicing of such shareholders would be sought. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
EXPENSES
SCMI and Schroder Advisors have voluntarily undertaken to waive a portion of
their fees or assume certain expenses of the Fund. This undertaking is designed
to place a maximum limit on total Fund expenses (excluding taxes, interest,
brokerage commissions and other portfolio transaction expenses and extraordinary
expenses) chargeable to Investor Shares of [ ____%]of the average daily net
assets of the Fund attributable to those shares. This expense limitation cannot
be modified or withdrawn except by a majority vote of the Trustees of the Trust
who are not affiliated persons (as defined in the Act) of the Trust. If expense
reimbursements are required, they will be made on a monthly basis.
PORTFOLIO TRANSACTIONS
SCMI places orders for the purchase and sale of the Portfolio's investments with
brokers and dealers selected by SCMI in its discretion and seeks "best
execution" of such portfolio transactions. The Portfolio may 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. Commission rates for brokerage transactions
are fixed on many foreign securities exchanges, and this may cause higher
brokerage expenses to accrue to the Portfolio than would be the case for
comparable transactions effected on U.S. securities exchanges.
Subject to the Portfolio's policy of obtaining the best price consistent with
quality of execution on transactions, SCMI may employ Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities") affiliates of
SCMI to effect transactions of the Portfolio on certain foreign securities
exchanges. Because of the affiliation between SCMI and Schroder Securities, the
Portfolio's payment of commissions to Schroder Securities is subject to
procedures adopted by Schroder Core II Board designed to ensure that such
commissions will not exceed the usual and customary brokers' commissions. No
specific portion of the Portfolio's brokerage will be directed to Schroder
Securities and in no event will Schroder Securities receive such brokerage in
recognition of research services.
Consistent with the Rules of the Association of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Schroder Core II Board may
determine, SCMI may consider sales of shares of the
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Fund or any other entity that invests in the Portfolio as a factor in the
selection of broker-dealers to execute portfolio transactions for the Portfolio.
Although the Portfolio does not currently engage in directed brokerage
arrangements to pay expenses, it may do so in the future. These are arrangements
whereby brokers executing the Portfolio's portfolio transactions would agree to
pay designated expenses of the Portfolio if brokerage commissions generated by
the Portfolio reached certain levels. These arrangements might reduce the
Portfolio's expenses (and, indirectly, the Fund's expenses). As anticipated,
these arrangements would not materially increase the brokerage commissions paid
by the Portfolio.
CODE OF ETHICS
The Trust, Schroder Core II, SCMI, Schroder Advisors, and Schroders Incorporated
have each adopted a code of ethics that contains a policy on personal securities
transactions by "access persons," including portfolio managers and investment
analysts. That policy complies in all material respects with the recommendations
set forth in the Report of the Advisory Group on Personal Investing of the
Investment Company Institute, of which the Trust is a member.
INVESTMENTS AND REDEMPTIONS
PURCHASE OF SHARES
Investors may purchase Investor Shares directly from the Trust. Prospectuses,
sales material and Account Applications can be obtained from the Trust or
through Forum Financial Corp., the Fund's transfer agent ("Transfer Agent").
(See "Other Information -- Shareholder Inquiries"). Investments may also be made
through Service Organizations that assist their customers in purchasing shares
of the Fund. Such Service Organizations may charge their customers a service fee
for processing orders to purchase or sell shares of the Fund. Investors wishing
to purchase shares through their accounts at a Service Organization should
contact that organization directly for appropriate instructions.
Shares of the Fund are offered at the net asset value next determined after
receipt of an order in proper form; one of the forms of payment described below
together with a completed Account Application (at the address set forth below).
The minimum initial investment is $100,000, except that the minimum for an IRA
is $25,000. There is no minimum amount for subsequent investments. The Trust
reserves the right to waive the minimum initial investment at its discretion.
All purchase payments are invested in full and fractional shares. The Fund is
authorized to reject any purchase order.
BY MAIL. Initial and subsequent purchases may be made by mailing a check (in
U.S. dollars) payable to "Schroder International Bond Fund" to:
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Schroder International Bond Fund - Investor Shares
P.O. Box 446
Portland, Maine 04112
For initial purchases, the check must be accompanied by a completed Account
Application in proper form. Further documentation, such as corporate resolutions
and instruments of authority, may be requested from corporations,
administrators, executors, personal representatives, directors or custodians to
evidence the authority of the person or entity making the investment.
BY WIRE. Investors and Service Organizations (on behalf of their customers) may
transmit purchase payments by Federal Reserve Bank wire directly to the Fund as
follows:
Chase Manhattan Bank
New York, NY
ABA No.: 021000021
For Credit To: Forum Financial Corp.
Acct. No.: 910-2-718187
Ref.: Schroder International Bond Fund - Investor Shares
Account of: (shareholder name)
Account Number: (shareholder account number)
The wire order must specify the name of the Fund, the Investor Shares class, the
account name and number, address, confirmation number, amount to be wired, name
of the wiring bank and name and telephone number of the person to be contacted
in connection with the order. If the initial investment is by wire, an account
number will be assigned and an Account Application must be completed and mailed
to the Fund. Wire orders received prior to 4:00 p.m. (Eastern Time) on each day
that the New York Stock Exchange is open for trading (a "Fund Business Day")
will be processed at the net asset value determined as of that day. Wire orders
received after 4:00 p.m. (Eastern Time) will be processed at the net asset value
determined as of the next Fund Business Day. See "Net Asset Value" below.
For each shareholder of record, the Fund's Transfer Agent, as the shareholder's
agent, establishes an open account to which all shares purchased are credited,
together with any dividends and capital gain distributions that are reinvested
in additional shares. Although most shareholders elect not to receive share
certificates, certificates for full shares can be obtained by written request to
the Fund's Transfer Agent. No certificates are issued for fractional shares.
The Transfer Agent will deem an account lost if six months have passed since
correspondence to the shareholder's address of record is returned, unless the
Transfer Agent determines the shareholder's new address. When an account is
deemed lost, dividends and capital gains will be reinvested in additional
shares. In addition, the amount of any outstanding checks for dividends and
capital gains that have been returned to the Transfer Agent will be reinvested
and such checks will be canceled.
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RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred retirement plans.
Applications forms and further information about these plans, including
applicable fees, are available upon request. Before investing in the Fund
through one of these plans, investors should consult their tax advisors.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be used as an investment vehicle for an IRA including SEP-IRA. An
IRA naming The First National Bank of Boston as custodian is available from the
Trust or the Transfer Agent. The minimum initial investment for an IRA is
$25,000. Under certain circumstances contributions to an IRA may be tax
deductible. IRAs are available to individuals who receive compensation or earned
income and their spouses, whether or not they are active participants in a tax-
qualified or government-approved retirement plan. An IRA contribution by an
individual who participates, or whose spouse participates, in a tax-qualified or
government-approved retirement plan may not be deductible, depending upon the
individual's income. Individuals also may establish an IRA to receive a
"rollover" contribution of distributions from another IRA or a qualified plan.
Tax advice should be obtained before effecting a rollover.
REDEMPTION OF SHARES
Shares of the Fund are redeemed at their next determined net asset value
following receipt by the Fund (at the address set forth above under "Purchase of
Shares") of a redemption request in proper form. (See "Net Asset Value.")
Redemption requests may be made between 9:00 a.m. and 6:00 p.m. (Eastern Time)
on each Fund Business Day. Redemption requests that are received prior to 4:00
p.m. (Eastern Time) will be processed at the net asset value determined as of
that day. Redemption requests that are received after 4:00 p.m. (Eastern Time)
on a Fund Business Day will be processed at the net asset value determined the
next Fund Business Day. See "Net Asset Value" below.
BY TELEPHONE. Redemption requests may be made by telephoning the Transfer Agent
at the Account Information telephone number on the cover page of this
Prospectus. A shareholder must provide the Transfer Agent with the class of
Shares, the dollar amount or number of shares to be redeemed, shareholder
account number, and some additional form of identification such as a password. A
redemption by telephone may be made only if the telephone redemption privilege
option has been elected on the Account Application or otherwise in writing. In
an effort to prevent unauthorized or fraudulent redemption requests by
telephone, reasonable procedures will be followed by the Transfer Agent to
confirm that such instructions are genuine. The Transfer Agent and the Trust
generally will not be liable for any losses due to unauthorized or fraudulent
redemption requests, but may be liable if they do not follow these procedures.
Shares for which certificates have been issued may not be redeemed by telephone.
In times of drastic economic or market changes, it may be difficult to make
redemptions by telephone. If a shareholder cannot reach the Transfer Agent by
telephone, redemption requests may be mailed or hand-delivered to the Transfer
Agent.
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<PAGE>
BY MAIL. Redemptions may be made by letter to the Fund specifying the class of
shares, the dollar amount or number of Shares to be redeemed and the shareholder
account number. The letter must also be signed in exactly the same way the
account is registered (if there is more than one owner of the Shares, all must
sign) and, in certain cases, signatures must be guaranteed by an institution
that is acceptable to the Transfer Agent. Such institutions include certain
banks, brokers, dealers (including municipal and government securities brokers
and dealers), credit unions and savings associations. Notaries public are not
acceptable. Further documentation may be requested to evidence the authority of
the person or entity making the redemption request. Questions concerning the
need for signature guarantees or documentation of authority should be directed
to the Fund at the above address or by calling the telephone number appearing on
the cover of this Prospectus.
If Shares to be redeemed are held in certificate form, the certificates must be
enclosed with the redemption request and the assignment form on the back of the
certificates, or an assignment separate from the certificates (but accompanied
by the certificates), must be signed by all owners in exactly the same way the
owners' names are written on the face of the certificates. Requirements for
signature guarantees and/or documentation of authority as described above could
also apply. For your protection, the Fund suggests that certificates be sent by
registered mail.
ADDITIONAL REDEMPTION INFORMATION. Checks for redemption proceeds will normally
be mailed within seven days. No redemption proceeds will be mailed until checks
in payment for the purchase of the Shares to be redeemed have been cleared,
which may take up to 15 calendar days from the purchase date. Unless other
instructions are given in proper form, a check for the proceeds of a redemption
will be sent to the shareholder's address of record.
The Fund may suspend the right of redemption during any period when (i) trading
on the New York Stock Exchange is restricted or that exchange is closed, (ii)
the SEC has by order permitted such suspension, or (iii) an emergency, as
defined by rules of the SEC, exists making disposal of portfolio investments or
determination of the Fund's net asset value not reasonably practicable.
If the Trust Board determines that it would be detrimental to the best interest
of the remaining shareholders of the Fund to make payment wholly or partly in
cash, the Fund may redeem Shares in whole or in part by a distribution in kind
of portfolio securities (from the investment portfolio of the Portfolio or of
the Fund), in lieu of cash, in conformity with applicable rules of the SEC. The
Fund will, however, redeem Shares solely in cash up to the lesser of $250,000 or
1% of net assets during any 90-day period for any one shareholder. In the event
that payment for redeemed Shares is made wholly or partly in portfolio
securities, the shareholder may be subject to additional risks and costs in
converting the securities to cash. See "Additional Purchase and Redemption
Information -- Redemption in Kind" in the SAI.
The proceeds of a redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for Federal income tax
purposes.
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Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem Shares in any account (other than an IRA) if at any
time the account does not have a value of at least $2,000, unless the value of
the account fell below that amount solely as a result of market activity.
Shareholders will be notified that the value of the account is less than $2,000
and be allowed at least 30 days to make an additional investment to increase the
account balance to at least $2,000.
NET ASSET VALUE
The net asset value per share of the Fund is calculated separately for each
class of Shares of the Fund at 4:00 p.m. (Eastern Time), Monday through Friday,
each Fund Business Day, which excludes the following U.S. holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per Share is calculated by
dividing the aggregate value of the Fund's assets less all Fund liabilities, if
any, by the number of Shares of the Fund outstanding.
Generally, securities held by the Portfolio that are listed on recognized stock
exchanges are valued at the last reported sale price, on the day when the
securities are valued (the "Valuation Day"), on the primary exchange on which
the securities are principally traded. Listed securities traded on recognized
stock exchanges for which there were no sales on the Valuation Day are valued at
the last sale price on the proceeding trading day or at closing mid-market
prices. Securities traded in over-the-counter markets are valued at the most
recent reported mid-market price. Other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith using methods approved by the Schroder Core II Board.
Trading in securities on non-U.S. exchanges and over-the-counter markets may not
take place on every day that the New York Stock Exchange is open for trading.
Furthermore, trading takes place in various foreign markets on days on which the
Fund's net asset value is not calculated. If events materially affecting the
value of foreign securities occur between the time when their price is
determined and the time when net asset value is calculated, such securities will
be valued at fair value as determined in good faith by using methods approved by
the Schroder Core II Board.
All assets and liabilities of the Portfolio denominated in foreign currencies
are valued in U.S. dollars based on the exchange rate last quoted by a major
bank prior to the time when the net asset value of the Fund is calculated.
DIVIDENDS, DISTRIBUTIONS AND TAXES
THE FUND
The Fund intends to comply with the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to regulated
investment companies. By complying
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therewith, the Fund will be relieved of Federal income tax on that part of its
investment company taxable income (consisting generally of its share of the
Portfolio's net investment income, net short-term capital gain and gain from
certain foreign currency transactions) and net long-term capital gain that is
distributed to its shareholders. The Fund intends to distribute substantially
all of its net investment income and its net realized long-term capital gain at
least annually and, therefore, intends not to be subject to Federal income tax.
If the Fund is eligible to do so, it intends to elect to permit its shareholders
to take a credit (or a deduction) for the Fund's share of foreign income taxes
paid by the Portfolio. If the Fund makes such an election, its shareholders
would include as gross income in their Federal income tax returns both
distributions received from the Fund and the amount that the Fund advises is
their pro rata portion of foreign income taxes paid with respect to or withheld
from dividends and interest paid to the Portfolio from its foreign investments.
Shareholders then would be entitled, subject to certain limitations, to take a
foreign tax credit against their Federal income tax liability for the amount of
such foreign taxes or else to deduct such foreign taxes as an itemized deduction
from gross income. The Fund intends to declare annually and pay as a dividend
substantially all of its net investment income and net short-term capital gain
and to distribute annually any net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net realized gains from
foreign currency transactions. The Fund also may make an additional dividend or
other distribution if necessary to avoid a 4% excise tax on certain
undistributed income and gain. Dividends and capital gain distributions on
Investor Shares are reinvested automatically in additional Investor Shares at
net asset value unless the shareholder has elected in the Account Application,
or otherwise in writing, to receive distributions in cash.
After every dividend and other distribution, the value of a Share declines by
the amount of the distribution. Purchases made shortly before a dividend or
other distribution include in the purchase price the amount of the distribution,
which will be returned to the investor in the form of a taxable distribution.
Dividends and other distributions paid by the Fund with respect to both classes
of its shares will be calculated in the same manner and at the same time. The
per share dividends on Advisor Shares are expected to be lower than the per
share dividends on Investor Shares as a result of any 12b-1 fees and other
compensation payable to Service Organizations for distribution assistance and
shareholder servicing for the Advisor Shares.
Dividends from the Fund's taxable income generally will be taxable to its
shareholders as ordinary income whether they are invested in additional Shares
or received in cash. Distributions by the Fund of any net capital gain
designated by the Fund as such will be taxable to a shareholder as long-term
capital gain, regardless of how long the shareholder has held the Shares and
whether they are invested in additional Shares or received in cash. Each year
the Trust will notify shareholders of the tax status of dividends and other
distributions.
As of the date of this Prospectus, and subject to changes in the tax law, a
redemption of Shares may result in taxable gain or loss to the redeeming
shareholder, depending on whether the redemption proceeds are more or less than
the shareholder's adjusted basis for the redeemed
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Shares. If Shares are redeemed at a loss after being held for six months or
less, the loss will be treated as a long-term, rather than a short-term, capital
loss to the extent of any capital gain distributions received on those Shares.
The Fund must withhold 31% from dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other noncorporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate also is required from dividends and capital
gain distributions payable to such shareholders who otherwise are subject to
backup withholding. Depending on the residence of a shareholder for tax
purposes, distributions from the Fund may also be subject to state and local
taxes, including withholding taxes. Shareholders should consult their own tax
advisors as to the tax consequences of ownership of Shares in their particular
circumstances.
There are tax requirements that all funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Portfolio may have
to limit its investment activity in some types of instruments.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for further information.
THE PORTFOLIO
The Portfolio will not be required to pay Federal income tax on its net
investment income and capital foreign currency gains because it is classified as
a partnership for Federal income tax purposes. All interest, dividends and gains
and losses of the Portfolio will be deemed to have been "passed through" to the
Fund in proportion to its holdings in the Portfolio, regardless of whether such
interest, dividends or gains have been distributed by the Portfolio.
The Portfolio intends to conduct its operations so as to enable the Fund to
qualify as a regulated investment company. Investment income received by the
Portfolio from sources within foreign countries may be subject to foreign income
or other taxes, which will reduce the yield on its securities.
OTHER INFORMATION
CAPITALIZATION AND VOTING
The Trust was organized as a Maryland corporation ("Schroder Capital Funds,
Inc.") on July 30, 1969 and on January 9, 1996 was reorganized as a Delaware
business trust. The Trust has authority to issue 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 portfolios or
series (such as the Fund) and may divide portfolios or series into classes of
shares (such as the Investor Shares), and the costs of doing so will be borne by
the Trust. The Trust
33
<PAGE>
currently consists of eight separate series, each of which has separate
investment objectives and policies. The Fund currently consists of two classes
of Shares.
Each share of the Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the classes, dividends and liquidation proceeds for
each class will likely differ. Shares are fully paid and non-assessable, and
have no pre-emptive rights. Shareholders have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held). On matters requiring shareholder approval,
shareholders of the Trust are entitled to vote only with respect to matters that
affect the interests of the Fund or the class of shares they hold, except as
otherwise required by applicable law.
There will normally be no meetings of shareholders to elect Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. However, the holders of not less than a majority of the
outstanding shares of the Trust may remove any person serving as a Trustee and
the Trust Board will call a special meeting of shareholders to consider 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. Each share of the Fund has
equal voting rights, except that if a matter affects only the shareholders of a
particular class only shareholders of that class shall have a right to vote.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund. Accordingly, those shareholders may be able to greatly affect (if
not determine) the outcome of a shareholder vote.
REPORTS
The Trust sends to each shareholder of the Fund a semi-annual report and an
audited annual report.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, N.A. is custodian of the Fund's and of the Portfolio's
assets. Forum Financial Corp. serves as the Fund's transfer and dividend
disbursing agent.
SHAREHOLDER INQUIRIES
Inquiries about the Fund, including its past performance, should be directed to:
Schroder International Bond Fund
P.O. Box 446
Portland, Maine 04112
Information about specific shareholder accounts may be obtained from the
Transfer Agent by calling (800) 344-8332.
34
<PAGE>
FUND STRUCTURE
CLASSES OF SHARES. The Fund has two classes of shares, Investor Shares and
Advisor Shares. Advisor Shares are offered by a separate prospectus to
individual investors, in most cases through Service Organizations. Advisor
Shares incur more expenses than Investor Shares. Except for certain differences,
each share of each class represents an undivided, proportionate interest in the
Fund. Each share of the Fund is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation of the Fund except that,
due to the differing expenses borne by the two classes, the amount of dividends
and other distributions will differ between the classes. Information about
Advisor Shares is available from the Fund by calling Schroder Advisors at (800)
730-2932.
THE PORTFOLIO. The Fund seeks to achieve its investment objective by investing
all of its investable assets in the Portfolio, which has substantially the same
investment objective and policies as the Fund. Accordingly, the Portfolio
directly acquires its own securities and the Fund acquires an indirect interest
in those securities. The Portfolio is a separate series of Schroder Core II, a
business trust organized under the laws of the State of Delaware in December
1996. Core Trust II is registered under the Act as an open-end management
investment company and currently has one separate portfolio. The assets of the
Portfolio, a non-diversified portfolio, belong only to, and the liabilities of
the Portfolio are borne solely by, the Portfolio and no other portfolio of
Schroder Core II. Upon liquidation of the Portfolio, investors would be entitled
to share pro rata in the net assets of the Portfolio available for distribution
to investors.
The Fund's investment in the Portfolio is in the form of a non-transferable
beneficial interest. As of [FEBRUARY __ 1997, THE FUND HAD ___ ADDITIONAL
INSTITUTIONAL INVESTORS IN THE PORTFOLIO]. The Portfolio may permit other
investment companies or institutional investors to invest in it. All other
investors in the Portfolio will invest on the same terms and conditions as the
Fund and will pay a proportionate share of the Portfolio's expenses.
The Portfolio normally will not hold meetings of investors except as required by
the 1940 Act. Each investor in the Portfolio will be entitled to vote in
proportion to its relative beneficial interest in the Portfolio. On most issues
subject to a vote of investors, as required by the Act and other applicable law,
the Fund will solicit proxies from its shareholders and will vote its interest
in the Portfolio in proportion to the votes cast by its shareholders. If there
are other investors in the Portfolio, there can be no assurance that any issue
that receives a majority of the votes cast by Fund shareholders will receive a
majority of votes cast by all investors in the Portfolio; indeed, if other
investors hold a majority interest in the Portfolio, they could have voting
control of the Portfolio.
The Portfolio will not sell its shares directly to members of the general
public. Another investor in the Portfolio, such as an investment company, that
might sell its shares to members of the general public would not be required to
sell its shares at the same public offering price as the Fund and could have
different advisory and other fees and expenses than the Fund. Therefore, Fund
shareholders may have different returns than shareholders in another investment
company
35
<PAGE>
that invests exclusively in the Portfolio. There is currently no such other
investment company that offers its shares to members of the general public.
Information regarding any such funds in the future will be available from
Schroder Core II by calling Forum Financial Corp. at (207) 879-8903.
Under federal securities laws, any person or entity that signs a registration
statement may be liable for a misstatement or omission of a material fact in the
registration statement. Schroder Core II, its Trustees and certain of its
officers are required to sign the registration statement of the Trust and may be
required to sign the registration statements of certain other future publicly
offered investors in the Portfolio. In addition, under federal securities laws,
Schroder Core II could be liable for misstatements or omissions of a material
fact in any proxy soliciting material of a publicly offered investor in Schroder
Core II, including the Fund. Under the Trust Instrument for Schroder Core II,
each investor in the Portfolio, including the Trust, will indemnify Schroder
Core II and its Trustees and officers ("Schroder Core II Indemnitees") against
certain claims.
Indemnified claims are those brought against Schroder Core II Indemnitees but
based on a misstatement or omission of a material fact in the investor's
registration statement or proxy materials, except to the extent such claim is
based on a misstatement or omission of a material fact relating to information
about Schroder Core II in the investor's registration statement or proxy
materials that was supplied to the investor by Schroder Core II. Similarly,
Schroder Core II will indemnify each investor in the Portfolio, including the
Fund, for any claims brought against the investor with respect to the investor's
registration statement or proxy materials, to the extent the claim is based on a
misstatement or omission of a material fact relating to information about
Schroder Core II that is supplied to the investor by Schroder Core II. In
addition, each registered investment company investor in the Portfolio will
indemnify each Schroder Core II Indemnitee against any claim based on a
misstatement or omission of a material fact relating to information about a
series of the registered investment company that did not invest in Schroder Core
II. The purpose of these cross-indemnity provisions is principally to limit the
liability of Schroder Core II to information that it knows or should know and
can control. With respect to other prospectuses and other offering documents and
proxy materials of investors in Schroder Core II, its liability is similarly
limited to information about and supplied by it.
CERTAIN RISKS OF INVESTING IN THE PORTFOLIO. The Fund's investment in the
Portfolio may be affected by the actions of other large investors in the
Portfolio, if any. For example, if the Portfolio had a large investor other than
the Fund that redeemed its interest in the Portfolio, the Portfolio's remaining
investors (including the Fund) might, as a result, experience higher pro rata
operating expenses, thereby producing lower returns.
The Fund may withdraw its entire investment from the Portfolio at any time, if
the Board determines that it is in the best interests of the Fund and its
shareholders to do so. The Fund might withdraw, for example, if there were other
investors in the Portfolio with power to, and who did by a vote of the
shareholders of all investors (including the Fund), change the investment
objective or policies of the Portfolio in a manner not acceptable to the Board.
A withdrawal could result in a distribution in kind of portfolio securities (as
opposed to a cash
36
<PAGE>
distribution) by the Portfolio. That distribution could result in a less
diversified portfolio of investments for the Fund and could affect adversely the
liquidity of the Fund's portfolio. If the Fund decided to convert those
securities to cash, it usually would incur brokerage fees or other transaction
costs. If the Fund withdrew its investment from the Portfolio, the Trust Board
would consider what action might be taken, including the management of the
Fund's assets in accordance with its investment objective and policies by SCMI,
the Fund's investment adviser and subadviser, respectively, or the investment of
all of the Fund's investable assets in another pooled investment entity having
substantially the same investment objective as the Fund. The inability of the
Fund to find a suitable replacement investment, in the event the Board decided
not to permit SCMI to manage the Fund's assets, could have a significant impact
on shareholders of the Fund.
37
<PAGE>
APPENDIX A
PRIOR PERFORMANCE OF THE PORTFOLIO MANAGER
Prior to the inception of Schroder International Bond Fund, the manager of its
corresponding Portfolio, Michael Perelstein, was the manager of MainStay
International Bond Fund (the "MainStay Fund"), which had an investment
objective, policies and limitations substantially similar to those of Schroder
International Bond Portfolio. Mr. Perelstein used the same analytical methods
when identifying potential investments for that fund as he now uses for Schroder
International Bond Portfolio. Mr. Perelstein was primarily responsible for the
day-to-day management of the MainStay Fund, and no other person played a
significant role in its management. The average total return for the MainStay
Fund, and the performance of the Salomon Brothers After Tax Non-U.S. Government
Bond Index, for the one-year period ended December 31, 1996, and for a period
that approximates Mr. Perelstein's tenure as portfolio manager were as follows:
January 1, 1995 (inception)
ONE YEAR To December 31, 1996
-------- ---------------------------
MainStay
International* _______% __________%
Bond Fund
Before
deducting
maximum
sales load ______% __________%
After
deducting
maximum
sales load ______% __________%
Salomon Brothers
After Tax Non-U.S.
Government Bond Index ______% __________%
* Mr. Perelstein was the portfolio manager of MainStay International Bond Fund
from ____ __, 199_, to December 31, 1996.
MainStay International Bond Fund is a separate fund and has different fees and
expenses than Schroder International Bond Fund. THE DATA ABOVE ARE PROVIDED TO
ILLUSTRATE THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AS MEASURED AGAINST SPECIFIED MARKET INDICES AND
DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. INVESTORS SHOULD NOT CONSIDER
THIS PERFORMANCE DATA AS AN INDICATION OF FUTURE PERFORMANCE OF THE PORTFOLIO,
OF THE FUND OR OF THE PORTFOLIO MANAGER.
38
<PAGE>
INVESTMENT ADVISER
Schroder Capital Management International Inc.
787 Seventh Avenue
New York, New York 10019
ADMINISTRATOR & DISTRIBUTOR
Schroder Fund Advisors Inc.
787 Seventh Avenue
New York, New York 10019
SUB-ADMINISTRATOR
Forum Administrative Services, LLC
Two Portland Square
Portland, Maine 04101
CUSTODIAN
The Chase Manhattan Bank, N.A.
Global Custody Division
Woolgate House, Coleman Street
London EC2P 2HD, United Kingdom
TRANSFER AND DIVIDEND DISBURSING AGENT
Forum Financial Corp.
P.O. Box 446
Portland, Maine 04112
INDEPENDENT ACCOUNTANTS
________________ L.L.P.
One Post Office Square
Boston, Massachusetts 02109
39
<PAGE>
Table of Contents
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . .
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Adviser . . . . . . . . . . . . . . . . . . . . .
Administrator and Distributor. . . . . . . . . . . . . . . .
Purchases and Redemptions of Shares. . . . . . . . . . . . .
Dividends and Distributions. . . . . . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . . .
Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVE, POLICIES
AND RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . .
Investment Objective . . . . . . . . . . . . . . . . . . . .
Investment Policies. . . . . . . . . . . . . . . . . . . . .
Investment Restrictions. . . . . . . . . . . . . . . . . . .
Non-Diversification. . . . . . . . . . . . . . . . . . . . .
Securities, Investment Policies and. . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF INVESTMENT. . . . . . . . . . . . . . . . . .
PRACTICES AND INVESTMENTS. . . . . . . . . . . . . . . . .
Investment Types . . . . . . . . . . . . . . . . . . . . . .
Investment Restrictions. . . . . . . . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . .
Board of Trustees. . . . . . . . . . . . . . . . . . . . . .
Investment Adviser and Portfolio Manager
Administrative Services. . . . . . . . . . . . . . . . . . .
Service Organizations. . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT IN THE FUND . . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . .
Retirement Plans . . . . . . . . . . . . . . . . . . . . . .
Individual Retirement Accounts . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . .
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS, OTHER DISTRIBUTIONS
AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . .
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
The Portfolio. . . . . . . . . . . . . . . . . . . . . . . .
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . .
Capitalization and Voting. . . . . . . . . . . . . . . . . .
Reports. . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . .
Custodian and Transfer Agent . . . . . . . . . . . . . . . .
Shareholder Inquires . . . . . . . . . . . . . . . . . . . .
Fund Structure . . . . . . . . . . . . . . . . . . . . . . .
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . .
40
<PAGE>
SCHRODER INTERNATIONAL
BOND FUND
Advisor Shares
This fund seeks a high rate of total return by investing primarily in a
portfolio of non-U.S. debt securities.
PROSPECTUS
MARCH 1, 1997
[World Map]
1-800-290-9826
SCHRODER CAPITAL FUNDS (DELAWARE) IS A FAMILY OF OPEN-END INVESTMENT COMPANIES
COMMONLY KNOWN AS MUTUAL FUNDS. THE SHARES OF MUTUAL FUNDS ARE NOT INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FDIC, THE FEDERAL RESERVE SYSTEM OR ANY
OTHER GOVERNMENT AGENCY. THE SHARES ALSO ARE NOT OBLIGATIONS, DEPOSITS OR
ACCOUNTS OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR ITS AFFILIATES.
AN INVESTMENT IN SHARES OF ANY MUTUAL FUND IS SUBJECT TO INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING SUBSTANTIALLY
ALL OF ITS ASSETS IN SCHRODER INTERNATIONAL BOND PORTFOLIO, (THE "PORTFOLIO"),
WHICH IN TURN INVESTS PRIMARILY IN A PORTFOLIO OF NON-U.S. DEBT SECURITIES. THE
PORTFOLIO IS A SEPARATELY MANAGED SERIES OF SCHRODER CAPITAL FUNDS II ("SCHRODER
CORE II"), AN OPEN-END, MANAGEMENT INVESTMENT COMPANY REGISTERED UNDER THE 1940
ACT. THE PORTFOLIO HAS AN IDENTICAL INVESTMENT OBJECTIVE AND SUBSTANTIALLY
SIMILAR INVESTMENT POLICIES AS THE FUND (SEE "OTHER INFORMATION - FUND
STRUCTURE"). ACCORDINGLY, THE INVESTMENT EXPERIENCE OF THE FUND IS DERIVED
DIRECTLY FROM THE INVESTMENT EXPERIENCE OF THE PORTFOLIO. OF COURSE, AS WITH ANY
MUTUAL FUND, THERE IS NO ASSURANCE THAT THE FUND OR PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
This prospectus sets forth concisely the information a prospective investor
should know and should be read and retained. To learn more about the Fund, you
may obtain a copy of the Fund's current Statement of Additional Information (the
"SAI") which is incorporated by reference into this Prospectus. The SAI has been
filed with the Securities and Exchange Commission ("SEC") and is available along
with other related materials for reference on the SEC's Internet Web Site
(http://www.sec.gov) or may be obtained without charge from the Trust by writing
to Two Portland Square, Portland, Maine 04101 or by calling 1-800-290-9826.
<PAGE>
PROSPECTUS SUMMARY
This prospectus offers Advisor Class shares ("Advisor Shares" or "Shares") of
the Schroder International Bond Fund (the "Fund"), which is a separately
managed, non-diversified series of Schroder Capital Funds (Delaware) (the
"Trust"), an open-end, management investment company registered under the
Investment Company Act of 1940 (the "1940 Act").
INVESTMENT ADVISER
The Portfolio's investment adviser is Schroder Capital Management International
Inc. ("SCMI"), 787 Seventh Avenue, New York, New York 10019. The Fund (and
indirectly its shareholders) bears a pro rata portion of the investment advisory
fee paid to SCMI by the Portfolio. See "Management of the Fund - Investment
Adviser and Portfolio Manager."
Prior to January 1, 1997, the Portfolio had no operating history. The historical
performance of another mutual fund previously managed by the Portfolio Manager
which had substantially similar investment objective, policies, limitations,
strategies and risks to those of the Fund, is presented in Appendix A.
ADMINISTRATIVE SERVICES
Schroder Fund Advisors Inc. ("Schroder Advisors") serves as administrator and
distributor of the Fund, and Forum Administrative Services, LLC ("Forum") serves
as the Fund's sub-administrator.
PURCHASES AND REDEMPTIONS OF SHARES. Shares may be purchased or redeemed by
mail, by bank-wire or through an investor's broker-dealer or other financial
institution. The minimum initial investment is $25,000, except that the minimum
for an Individual Retirement Account ("IRA") is $2,000. The minimum subsequent
investment is $2,000. See "Investment in the Fund -- Purchase of Shares" and "--
Redemption of Shares."
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund declares annually and pays as a
dividend substantially all of its net investment income and realized net short-
term capital gain, and at least annually distributes any net realized long-term
capital gain and gains from foreign currency transactions. Dividends and capital
gain distributions are reinvested automatically in additional Advisor Shares of
the Fund at net asset value unless the shareholder has notified the Fund in an
Account Application or otherwise in writing of the shareholder's election to
receive dividends or other distributions in cash. See "Dividends, Other
Distributions and Taxes."
2
<PAGE>
------------
SCHRODER INTERNATIONAL BOND FUND
OBJECTIVE: High rate of total return by investing primarily in a Portfolio of
non-U.S. debt securities.
STRATEGY: Invests mainly in foreign bonds, primarily debt securities of foreign
governments, agencies and supranational organizations denominated in foreign
currencies.
------------
RISK CONSIDERATIONS
Alone, the Fund is not a balanced investment plan. It is intended for long-term
investors seeking investments in markets outside the U.S., who are willing to
accept the risks of foreign investing.
It is important to note that the Portfolio's investments in the securities of
issuers located in foreign countries may involve certain risks not associated
with domestic investing, such as the possible imposition of exchange controls or
other foreign governmental, laws or restrictions.
The Fund's net asset value ("NAV") is expected to vary because the market value
of the Portfolio's investments will change due to changes in the value of the
securities in which the Portfolio invests, market conditions, interest rates,
currency fluctuations, or other political or economic news. The Fund is non-
diversified, which means that it may invest a greater portion of its assets in
securities of individual issuers than diversified funds. Consequently, changes
in the market value of a single issuer could cause greater fluctuations in the
Fund's NAV than would occur in a more diversified fund. When you sell your
shares, they may be worth more or less than what you paid for them. (See
"Investment Objectives, Policies and Risk Considerations --. Risk
Considerations").
[Check Mark] UNDERSTANDING MUTUAL FUNDS
(SOME SORT OF CALL-OUT BOX SHOWING THE RISK DIFFERENTIAL AMONG MONEY MARKET,
BOND, EQUITY, ASSET-ALLOCATION FUNDS? OR SOMETHING ELSE?)
[World Map]
3
<PAGE>
FEE TABLE
Transaction and Operating Expenses. The table below shows the estimated costs
and expenses that you would incur as a holder of Advisor Shares, based upon the
projected annual operating expenses for the Fund's first year. The table
includes the Fund's estimated pro rata portion of the Portfolio's operating
expenses, which are borne indirectly by the Fund's shareholders.
<TABLE>
<CAPTION>
TRANSACTION EXPENSES OPERATING EXPENSES EXAMPLES
<S> <C> <C> <C> <C> <C> <C>
SCHRODER Maximum sales NONE Management Fee ____% After 1 Year $
INTERNATIONAL charge on
BOND purchases and
FUND reinvested dividends
Deferred sales NONE 12b-1 Fee NONE After 3 Years $
charge on
redemptions
Exchange Fee NONE Other Expenses After 5 Years $
(after waivers or
reimbursements) ____%
TOTAL FUND After 10 Years $
OPERATING
EXPENSES (after
waivers or
reimbursements) ____
____%
</TABLE>
SCMI has voluntarily agreed to limit its management fee to an annual rate of
[0.00]% of the Portfolio's average daily net assets. See page ___ for further
explanation of these fees. Absent any fee waivers and expense reimbursements
Other Expenses and Total Operating Expenses of the Fund would be ____% and
____%, respectively.
Transaction expenses may be charged directly to an investor when buying, selling
or exchanging shares of the Fund. Operating expenses, which are paid out of the
Fund's assets, are factored into the Fund's share price and are not charged
directly to shareholder accounts.
EXAMPLE. The table below indicates how much you would pay in total expenses for
a $1,000 investment in the Fund, assuming (1) a 5% annual return and (2)
redemption at the end of each time period. The example is based on projected
expenses for the Fund's first year of operation, assumes the reinvestment of all
dividends and other distributions, and does not reflect the effect of taxes. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
RETURNS; ACTUAL EXPENSES OR RETURNS MAY VARY FROM THOSE SHOWN.
4
<PAGE>
PERFORMANCE
The Fund's performance may be quoted in advertising in terms of yield or total
return. All performance information is based on historical results and is not
intended to indicate future performance. A Fund's yield is a way of showing the
rate of income the Fund earns on its investments as a percentage of the Fund's
share price. To calculate standardized yield, a Fund takes the interest income
it earned from its investments for a 30-day period (net of expenses), divides it
by the average number of shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Fund's share price at the
end of the 30-day period. The Fund's total return shows its overall change in
value, including changes in share price and assuming all the Fund's dividends
and distributions are reinvested. A cumulative total return reflects the Fund's
performance over a stated period of time. An average annual total return
reflects the hypothetical annually compounded return that would have produced
the same cumulative total return if the Fund's performance had been constant
over the entire period. Because average annual returns tend to smooth out
variations in the Fund's returns, shareholders should recognize that they are
not the same as actual year-by-year results. To illustrate the components of
overall performance, a Fund may separate its cumulative and average annual
returns into income results and capital gain or loss. Published yield quotations
are, and total return figures may be, based on amounts actually invested in the
Fund net of sales loads that may be paid by an investor. A computation of yield
or total return that does not take into account the sales load paid by an
investor will be higher than a computation based on the public offering price of
shares purchased that take into account payment of the sales load.
The Fund's advertisements may reference ratings and rankings among similar
mutual funds by independent evaluators such as Morningstar, Inc., Lipper
Analytical Services, Inc. and IBC/Donoghue, Inc. The comparative material found
in the Fund's advertisements, sales literature or reports to shareholders may
contain performance ratings. This material is not to be considered
representative or indicative of future performance. All performance information
for the Fund is calculated on a class basis. In addition, the Fund may use a
benchmark securities index as a measure of the Fund's performance. These indices
are not used in the management of the Fund but rather are standards by which the
Adviser and shareholders may compare the performance of the Fund to an unmanaged
composite of securities with similar, but not identical, characteristics as the
Fund. The Fund may from time to time advertise a comparison of their performance
against any of these or other indices.
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
The Fund is designed for investors seeking a high rate of total return by
investing mainly in debt securities and debt-related investments, which may be
domestic or foreign, and may be denominated in foreign or U.S. currency. The
Fund has a fundamental investment policy that allows it to invest primarily in
the Portfolio which in turn, invests primarily in a portfolio of non-U.S. debt
securities. All other investment policies of the Fund and the Portfolio are
substantially identical. There can be no assurance that the Fund or Portfolio
will achieve its investment objective.
5
<PAGE>
Although the following information describes the investment policies of the
Portfolio and the responsibilities of Schroder Core II's Board of Trustees (the
"Schroder Core II Board"), it applies equally to the Fund and the Trust's Board
of Trustees (the "Board"). Additional information concerning the investment
policies of the Fund and the Portfolio is contained in the SAI.
INVESTMENT OBJECTIVE
The investment objective of the Portfolio is to seek to provide a high rate of
total return by investing primarily in a portfolio of non-U.S. debt securities.
There can be no assurance that the Portfolio will achieve its investment
objective. The investment objective of the Portfolio may not be changed without
approval of the holders of a majority of the outstanding voting interests
(defined in the same manner as the phrase "vote of a majority of the outstanding
voting securities" is defined in the 1940 Act) of the Portfolio.
-----------------
INVESTMENT POLICIES
The Portfolio will seek to achieve its investment objective by investing in debt
securities and debt-related investments, which may be domestic or foreign, and
may be denominated in foreign or U.S. currency.
The Portfolio will, under normal market conditions, invest at least 65% of its
total assets in foreign bonds, primarily debt securities of foreign governments,
agencies and supranational organizations denominated in foreign currencies.
These could have fixed, variable, floating or inverse floating rates of
interest. The Portfolio may also purchase debt securities of corporate issuers.
Some of these securities may be privately issued and/or convertible into common
stock or they may be traded together with warrants for the purchase of common
stock.
The Portfolio may invest in a variety of countries, and under ordinary
circumstances will invest in a minimum of 5 countries other than the U.S. This
includes countries with established economies as well as emerging market
countries, including, but not limited to, those in Latin America and other newly
industrialized countries, such as South Korea and Taiwan, that the investment
adviser believes present favorable opportunities.
The Portfolio may invest up to 10% of its net assets in lower-rated debt
securities, including short-term instruments. Lower-rated securities are rated
below BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors Service
("Moodys"). (See "Appendix A - Description of Securities Ratings.")
In order to enhance returns, manage risk more efficiently, reduce trading costs,
and help protect against changes in securities prices and foreign exchange
rates, the Portfolio may invest in currency on a spot or forward basis,
securities or securities index options, foreign currency
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options, futures contracts and related options on futures contracts, and may
enter into swap agreements. Additionally, the Portfolio may sell interest rate
and bond index futures contracts, options on interest rate and bond index
futures contracts and options and futures on debt securities, in each case for
hedging purposes only.
The Portfolio may also (i) borrow up to 15% of its total assets, (ii) lend its
securities to brokers, dealers and other financial institutions to earn income,
(iii) buy securities on a when-issued, firm, or standby commitment basis (whose
market value may change prior to their delivery to the Portfolio), (iv) invest
in repurchase agreements and enter into reverse repurchase agreements (which can
create leverage and increase the Portfolio's investment risk), and (v) invest in
loan participation interests (which involve certain risks, including credit and
liquidity risks). (See "Loan Participation Interests" for further details.).
INVESTMENT RESTRICTIONS
The investment objective and the investment policies of the Portfolio that are
designated as fundamental may not be changed without approval of the holders of
a majority of the outstanding voting securities of the Portfolio. A majority of
outstanding voting securities means the lesser of (1) 67% of the shares present
or represented at a shareholder meeting at which the holders of more than 50% of
the outstanding shares are present or represented, or (ii) more than 50% of
outstanding shares. Unless otherwise indicated, all investment policies of the
Portfolio are not fundamental and may be changed by the Schroder Core II Board
without approval of the interest holders of the Portfolio. Likewise, non-
fundamental investment policies of the Fund may be changed by the Board without
approval of the Fund's shareholders.
NON-DIVERSIFICATION
The Fund is classified as a "non-diversified" investment company under the 1940
Act. In contrast to a "diversified" company, a non-diversified company may
invest more than 5% of its total assets in the securities of any one issuer.
However, so that the Fund may continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), the Portfolio will limit its investments so that at the close of
each quarter of the taxable year, (i) not more than 25% of the market value of
the Portfolio's total assets will be invested in the securities of a single
issuer, and (ii) with respect to 50% of the market value of its total assets not
more than 5% will be invested in the securities of a single issuer and the
Portfolio will not own more than 10% of the outstanding voting securities of a
single issuer.
SECURITIES, INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following pages contain additional information about the securities in which
the Portfolio may invest, strategies SCMI may employ in pursuit of the
Portfolio's objective, and a summary of related risks. A complete listing of the
Portfolio's investment restrictions and more detailed
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information about the Portfolio's investments is contained in the SAI. Policies
and limitations are considered at the time of purchase.
SCMI may not buy any of these instruments or use these techniques unless it
believes that they are consistent with the Portfolio's objective. Current
holdings and recent investment strategies are described in the Fund's financial
reports which are sent to shareholders twice a year. For a free financial report
or SAI, please call 1-800-290-9826.
DESCRIPTION OF INVESTMENT PRACTICES AND INVESTMENTS
The investment adviser considers factors such as prospects for currency exchange
and interest rates, inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions, and the
quality of individual issuers. The investment adviser will also determine, using
good faith judgment, (1) country allocation, (2) currency exposure (asset
allocation across currencies) and (3) diversified security holdings within each
market.
Securities acquired by the Portfolio may be denominated in multinational
currency units such as the European Currency Unit ("ECU"). Securities of issuers
within a given country may be denominated in the currency of another country.
The investment adviser believes that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between securities denominated in different currencies and/or changes in value
between currencies. Moreover, the investment adviser believes active currency
management can be employed as an overall portfolio risk management tool. Foreign
currency management can also provide overall portfolio risk diversification.
Generally, the Portfolio's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Portfolio may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales.
FIXED INCOME SECURITIES AND THEIR CHARACTERISTICS. Investments by the Portfolio
in fixed income securities, including money market instruments, are subject to
risk even if all fixed income securities in the Portfolio's investment portfolio
are paid in full at maturity. All fixed income securities, including U.S.
Government Securities, can change in value when there is a change in interest
rates or the issuer's actual or perceived creditworthiness or ability to meet
its obligations.
The market value of the interest-bearing debt securities held by the Portfolio
will be affected by changes in interest rates. There is normally an inverse
relationship between the market value of securities sensitive to prevailing
interest rates and actual changes in interest rates. In other words, an increase
in interest rates produces a decrease in market value. Moreover, the longer the
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remaining maturity of a security, the greater will be the effect of interest
rate changes on the market value of that security. Changes in the ability of an
issuer to make payments of interest and principal and changes in the market's
perception of an issuer's creditworthiness will also affect the market value of
the debt securities of that issuer. The possibility exists, therefore, that, the
ability of any issuer to pay, when due, the principal of and interest on its
debt securities may become impaired.
RATING MATTERS. The Portfolio may purchase unrated securities if SCMI determines
the security to be of comparable quality to a rated security that the Portfolio
may purchase. Unrated securities may not be as actively traded as rated
securities. The Portfolio may retain a security whose rating has been lowered if
SCMI determines that retaining the security is in the best interests of the
Portfolio.
The Portfolio's investments are subject to "credit risk" relating to the
financial condition of the issuers of the securities that the Portfolio holds. A
further description of the rating categories of certain nationally recognized
statistical rating organizations (each a "NRSRO") is contained in the SAI. All
these ratings are generally considered to be investment grade ratings, although
Moody's indicates that securities with long-term ratings of Baa have speculative
characteristics, and issuers whose securities are rated in the lowest investment
grade are more likely to have a weakened capacity to make principal and interest
payments due to changes in economic conditions or other circumstances than is
the case with issues of higher-grade bonds.
For more information about the investments described in this section, please see
the SAI.
ARBITRAGE
The Portfolio may sell a security in one market and simultaneously purchase the
same security in another market, or it may buy a security in one market and
simultaneously sell it in another market, in order to take advantage of
differences in the price of the security in the different markets. The Portfolio
does not actively engage in arbitrage. Such transactions may be entered into
only with respect to debt securities and will occur only in a dealer's market
where the buying and selling dealers involved confirm their prices to the
Portfolio at the time of the transaction, thus eliminating any risk to the
assets of the Portfolio.
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
The Portfolio may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and in certificates of deposit, time deposits, and other short-term obligations
issued by savings and loan associations ("S&Ls"). Certificates of deposit are
receipts from a bank or an S&L for funds deposited for a specified period of
time at a specified rate of return. Time deposits in banks or S&Ls are generally
similar to certificates of deposit, but are uncertificated. Bankers' acceptances
are time drafts drawn on commercial banks by borrowers, usually in connection
with international commercial transactions. The Portfolio may not invest in time
deposits maturing in more than seven days
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which are subject to withdrawal penalties. The Portfolio will limit its
investment in time deposits for which there is a penalty for early withdrawal to
10% of its net assets.
BORROWING
The Portfolio may borrow up to a limit of 15% of its total assets from a bank,
but only for temporary or emergency purposes. Borrowing may exaggerate the
effect on the Portfolio's net asset value of any increase or decrease in the
value of the Portfolio's portfolio securities. Money borrowed will be subject to
interest costs (which may include commitment fees and/or the cost of maintaining
minimum average balances). The Portfolio will repay any money borrowed from a
bank in excess of 5% of its total assets prior to purchasing additional
securities. In addition, the Portfolio may invest up to one-third of its total
assets in reverse repurchase agreements subject to the limitations set forth
under "Repurchase Agreements and Reverse Repurchase Agreements".
BRADY BONDS
The Portfolio may invest a portion of its assets in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructuring
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (primarily
the dollar) and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered U.S. Government securities. In light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
There can be no assurance that Brady Bonds acquired by the Portfolio will not be
subject to restructuring arrangements or to requests for new credit, which may
cause the Portfolio to suffer a loss of interest or principal on any of its
holdings. (For further information see "Brady Bonds," in the Statement of
Additional Information.)
COMMERCIAL PAPER
The Portfolio may invest in commercial paper. The Portfolio will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Portfolio's investment
adviser determines that the commercial paper is of comparable quality.
Commercial paper represents short-term unsecured promissory notes issued by
banks or bank holding companies, corporations and finance companies. (See
"Appendix A--Description of Securities Ratings.").
CORPORATE DEBT SECURITIES
The Portfolio's investments in U.S. dollar- or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds,
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debentures, notes and other similar corporate debt instruments) which meet the
credit quality and maturity criteria set forth for the Portfolio. The rate of
return or return of principal on some debt obligations may be linked to indexes
or stock prices or indexed to the level of exchange rates between the U.S.
dollar and foreign currency or currencies.
Corporate debt securities with a rating lower than BBB by S&P, and corporate
debt securities rated Baa or lower by Moody's have speculative characteristics,
and changes in economic conditions or individual corporate developments are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of high grade bonds. The Portfolio may invest up to 10% of its
net assets in debt securities which are rated below investment grade. (See "High
Yield Securities ("Junk Bonds").
FIRM AND STANDBY COMMITMENT AGREEMENTS AND
WHEN-ISSUED SECURITIES
New issues of certain debt securities are often offered on a when-issued basis.
That is, the payment obligation and the interest rate are fixed at the time the
buyer enters into the commitment, but delivery and payment for the securities
normally take place after the date of the commitment to purchase. Firm and
standby commitment agreements call for the purchase of securities at an agreed-
upon price on a specified future date. The transactions are entered into in
order to secure what is considered to be an advantageous price and yield to the
Portfolio and not for purposes of leveraging the Portfolio's assets. However,
the Portfolio will not accrue any income on these securities prior to delivery.
The value of when-issued securities and firm and standby commitment agreements
may vary prior to and after delivery depending on market conditions and changes
in interest rate levels. There is a risk that a party with whom the Portfolio
has entered into such transactions will not perform its commitment, which could
result in a gain or loss to the Portfolio.
FLOATING AND VARIABLE RATE SECURITIES AND
INVERSE FLOATERS
Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be event
based, such as based on a change in the prime rate.
The Portfolio may, to the extent permitted by law, invest in floating rate debt
instruments ("floaters"). The interest rate on a floater is a variable rate tied
to another interest rate, such as a money market index or Treasury bill rate.
The Portfolio may, to the extent permitted by law, invest in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude
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that exceeds the magnitude of the change in the index rate of interest. The
higher degree of leverage inherent in inverse floaters is associated with
greater volatility in their market values. Accordingly, the duration of an
inverse floater may exceed its stated final maturity. Certain inverse floaters
may be deemed to be illiquid securities.
FOREIGN CURRENCY TRANSACTIONS
Forward foreign currency exchange contracts ("forward contracts") are intended
to minimize the risk of loss to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price at
a future date which is individually negotiated and privately traded by currency
traders and their customers. A forward contract may be used, for example, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar price of
the security.
Such contracts do not eliminate fluctuations in the underlying prices of
securities held by the Portfolio. Although such contracts tend to minimize the
risk of loss due to a decline in the value of a currency that has been sold
forward, and the risk of loss due to an increase in the value of a currency that
has been purchased forward at the same time they tend to limit any potential
gain that might be realized should the value of such currency increase.
Successful use of forward contracts depends on the investment adviser's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Portfolio's exposure to currency exchange rate activity and could result in
losses to the Portfolio if currencies do not perform as the investment adviser
anticipates. The Portfolio may also incur significant costs when converting
assets from one currency to another.
FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility, the
Portfolio may invest in instruments that have the investment characteristics of
particular securities, securities indexes, futures contracts or currencies. Such
instruments may take a variety of forms, such as debt instruments with interest
or principal payments determined by reference to the value of a currency or
commodity at a future point in time. A foreign index may be based upon the
exchange rate of a particular currency or currencies, the differential between
two currencies, the level of interest rates in a particular country or
countries, or the differential in interest rates between particular countries.
In the case of foreign index-linked instruments linking the interest components
to a foreign index, the amount of interest payable will adjust periodically in
response to changes in the level of the foreign index during the term of the
foreign index-linked instrument. The risks of such investments would reflect the
risks of investing in the index or other instrument, the performance of which
determines the return for the instrument. Tax considerations may limit the
Portfolio's ability to invest in foreign index-linked instruments.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS
The Portfolio may enter into futures contracts and related options, which may be
used for any legal purpose including to reduce trading costs. An interest rate
or stock index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date. There are several risks associated with the use of
futures and related options for hedging purposes. There can be no assurance that
a liquid market will exist at a time when the Portfolio seeks to close out a
futures contract or a futures option position. Most futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures contract prices
during a single day: once the daily limit has been reached on a particular
contract, no trades may be made that day at a price beyond that limit. In
addition, certain of these instruments are relatively new and without a
significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent the Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the securities or
currencies being hedged. An incorrect correlation could result in a loss on both
the hedged securities or currencies and the hedging vehicle so that the
Portfolio's return might have been better had hedging not been attempted. Use of
options on securities, options on stock or bond indices, and warrants are
subject to similar risk considerations (See "Options on Securities and Options
on Stock or Bond Indices" below.)
GOVERNMENT SECURITIES
Government securities are obligations of, or guaranteed by, the U.S. government
or its agencies or instrumentalities. Some U.S. government securities, such as
Treasury bills, notes and bonds, are supported by the full faith and credit of
the United States; others, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. government to purchase the agency's
obligations; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality.
HIGH YIELD SECURITIES
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade". There is more price volatility, greater risk of
losing principal and interest, a greater possibility of the issuer going
bankrupt, and other additional risks. These securities are considered
speculative.
The Portfolio may invest up to 10% of its net assets in debt securities,
including short-term instruments, that are rated below investment grade (i.e.,
below BBB by S&P or Baa by Moody's)
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or, if not rated, are deemed to be of equivalent quality by the investment
adviser. The lower the ratings of such securities, the greater their risks.
Moody's considers bonds it rates Baa to have speculative elements as well as
investment grade characteristics. The Portfolio may invest in securities which
are rated D by S&P or, if unrated, are of equivalent quality. Securities rated D
may be in default with respect to payment of principal or interest. (See
"Appendix A--Description of Securities Ratings.")
Investors should consider and be willing to accept the risks associated with
high yield securities before investing. Investment in such bonds involves
special risks in addition to the risks associated with investments in higher
rated debt securities. High yield bonds may be regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
the Portfolio to achieve its investment objective may, to the extent of its
investment in high yield bonds, be more dependent upon such credit analysis than
would be the case if the Portfolio were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, the Portfolio may incur additional expenses to seek recovery. In the
case of high yield bonds structured as zero coupon or payment-in-kind
securities, the market prices of such securities are affected to a greater
extent by interest rate changes and, therefore, tend to be more volatile than
securities which pay interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which the Portfolio could sell a high
yield bond, and could adversely affect and cause large fluctuations in the daily
net asset value of the Portfolio's shares.
The use of credit ratings as the sole method for evaluating high yield bonds
also involves certain risks. For example, credit ratings evaluate the safety of
principal and interest payments, not the market value risk of high yield bonds.
Also, credit rating agencies may fail to change credit ratings on a timely basis
to reflect subsequent events.
ILLIQUID AND RESTRICTED SECURITIES
As a non-fundamental policy, the Portfolio will not purchase or otherwise
acquire any security if, as a result, more than 15% of its net assets (taken at
current value) would be invested in securities that are illiquid by virtue of
the absence of a readily available market or because of legal or contractual
restrictions on resale ("restricted securities"). There may be undesirable
delays in selling illiquid securities at prices representing their fair value.
This policy includes over-the-counter options held by the Portfolio and the "in
the money" portion of the assets used
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to cover such options. The limitation on investing in restricted securities does
not include securities that may not be resold to the general public but may be
resold to qualified institutional purchasers pursuant to Rule 144A under the
Securities Act of 1933, as amended. If SCMI determines that a "Rule 144A
security" is liquid pursuant to guidelines adopted by the Board, the security
will not be 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 Rule 144A
security, that security may become illiquid, which could affect the Portfolio's
liquidity. (See "Investment Policies - Illiquid and Restricted Securities" in
the SAI for further information.)
LENDING OF PORTFOLIO SECURITIES
The Portfolio may lend its investment securities to brokers, dealers and
financial institutions for the purpose of realizing additional income. The total
market value of securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. The risk in lending portfolio securities, as with
other extensions of credit, is the possible loss of rights in the collateral
should the borrower fail financially. In determining whether to lend securities,
the Portfolio's investment adviser will consider all relevant facts and
circumstances, including the creditworthiness of the borrower.
LOAN PARTICIPATION INTERESTS
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank and sets forth the rights and duties of
the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants that must be kept by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. The Portfolio may incur additional credit risk,
however, when it is in the position of participant rather than a co-lender
because the Portfolio must assume the risk of insolvency of the co-lender from
which the participation interest was acquired and that of any person
interpositioned between the Portfolio and the co-lender.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The value of some mortgage-related or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to use these instruments successfully may depend in part upon the
ability of an investment adviser to forecast interest rates and other economic
factors. While principal and interest payments on some mortgage-related
securities may be guaranteed by
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the U.S. government, government agencies or other guarantors, the market value
of such securities is not guaranteed.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities are
securities representing interest in "pools" of mortgages in which payments of
both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans that underlie the securities (net of fees paid to the
issuer or guarantor of the securities). Early repayment of principal on mortgage
pass-through securities (arising from prepayments of principal due to sale of
the underlying property, refinancing, or foreclosure (net of fees and costs
which may be incurred)) may expose the Portfolio to a lower rate of return upon
reinvestment of principal. Also, if a security subject to repayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE MORTGAGE INVESTMENT
CONDUITS ("REMICS"). CMOs are hybrid instruments with characteristics of both
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and pre-paid principal on a CMO are paid, in most cases, semi-annually.
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
Government National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). CMOs
are structured into multiple classes, with each class bearing a different stated
maturity. Monthly payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding the
longer maturity classes receive principal only after the first class has been
retired. REMICs are similar to CMOs and are fixed pools of mortgages with
multiple classes of interests held by investors. The cash flow generated by the
mortgage assets underlying a series of CMOs is applied first to make required
payments of principal and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The residual interest in a CMO structure
generally represents the interest in any excess cash flow remaining after making
the foregoing payments. The Portfolio limits its investment in CMO residuals to
less than 5% of its net assets.
OTHER MORTGAGE-RELATED SECURITIES. The Portfolio's investment adviser expects
that governmental, government-related or private entities may create mortgage
loan pools and other mortgage-related securities offering mortgage pass-through
and mortgage-collateralized investments in addition to those described above. As
new types of mortgage-related securities are developed and offered to investors,
the Portfolio's investment adviser will, consistent with the Portfolio's
investment objective, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
OTHER ASSET-BACKED SECURITIES. Other asset-backed securities (unrelated to
mortgage loans) have been offered to investors, such as "CARs" ("Certificates
for Automobile Receivables"). CARs represent undivided fractional interests in a
trust whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARs are "passed-through" monthly to
certificate holders,
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and are guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution unaffiliated with the trustee
or originator of the trust. Underlying sales contracts are subject to
prepayment, which may reduce the overall return to certificate holders. If the
letter of credit is exhausted, certificate holders may also experience delays in
payment or losses on CARs, if the full amounts due on underlying sales contracts
are not realized by the trust because of unanticipated legal or administrative
costs of enforcing the contracts, or because of depreciation, damage or loss of
the vehicles securing the contracts, or other factors. If consistent with its
investment objective and policies, the Portfolio may invest in CARs and in other
asset-backed securities that may be developed in the future.
The Portfolio will invest only in mortgage-related (or other asset-backed)
securities either (i) issued by U.S. government-sponsored corporations
(currently GNMA, FHLMC and FNMA), or (ii) rated Baa or better by Moody's or BBB
or better by S&P or, if not rated, of comparable investment quality as
determined by the Portfolio's investment adviser.
OPTIONS ON FOREIGN CURRENCIES
The Portfolio may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. The Portfolio may also use foreign currency options
to protect against potential losses in positions denominated in one foreign
currency against another foreign currency in which the Portfolio's assets are or
may be invested. As with other kinds of option transactions, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations, although, in the event of
rate movements adverse to the Portfolio's position, the Portfolio may forfeit
the entire amount of the premium plus related transaction costs. Options on
foreign currencies to be written or purchased by a Portfolio will be traded on
U.S. and foreign exchanges or over-the-counter.
OPTIONS ON SECURITIES AND OPTIONS ON STOCK OR
BOND INDICES
A put option is a short-term contract that gives the purchaser of the put
option, in return for a premium, the right to sell the underlying security to
the seller of the option at a specified price during the term of the option. A
call option is a short-term contract that gives the purchaser the right to buy
from the seller of the option the underlying security at a specified price
during the term of the option. A call option on a stock or bond index gives the
purchaser of the option, in return for the premium paid, the right to receive
from the seller cash equal to the difference between the closing price of the
index and the exercise price of the option. The Portfolio will only write
"covered" call options and "secured" put options. A "covered" call option means
generally that so long as the Portfolio is obligated as the writer of a call
option, the Portfolio will either own the underlying securities subject to the
call, or hold a call at the same exercise price, for the same exercise period,
and on the same securities as the call written. A "secured" put
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option means generally that so long as the Portfolio is obligated as the writer
of the put option, the Portfolio will maintain liquid assets with a value equal
to the exercise price in a segregated account, or hold a put on the same
underlying security at an equal or greater exercise price. Options in which the
Portfolio may invest may be traded on exchanges and in the over-the-counter
market.
REPURCHASE AGREEMENTS AND
REVERSE REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements. A repurchase agreement is a
means of investing monies for a short period. In a repurchase agreement, a
seller -- a U.S. bank or recognized broker-dealer -- sells securities to the
Portfolio and agrees to repurchase the securities at the Portfolio's cost plus
interest within a specified period (normally one day). In these transactions,
the values of the underlying securities purchased by the Portfolio are monitored
at all times by SCMI to ensure that the total value of the securities equals or
exceeds the value of the repurchase agreement, and the Portfolio 's custodian
bank holds the securities until they are repurchased. In the event of default by
the seller under the repurchase agreement, the Portfolio may have difficulties
in exercising its rights to the underlying securities and may incur costs and
experience time delays in disposing of them. To evaluate potential risks, SCMI
reviews the creditworthiness of those banks and dealers with which the Portfolio
enters into repurchase agreements.
The Portfolio may enter into reverse repurchase agreements with banks or broker-
dealers, which involves the sale of a security by the Portfolio and its
agreement to repurchase the instrument at a specified time and price. The
Portfolio will maintain a segregated account consisting of cash, U.S. government
securities, foreign government securities provided they are of high liquidity
and quality, or other high-grade debt obligations maturing not later than the
expiration of the reverse repurchase agreement, to cover its obligations under
reverse repurchase agreements. The Portfolio will limit its investments in
reverse repurchase agreements and other borrowing to no more than one-third of
its total assets. The use of reverse repurchase agreements by the Portfolio
creates leverage that increases the Portfolio's investment risk. If the income
and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the cost of the agreements, the Portfolio's earnings or net
asset value will increase faster than otherwise would be the case; conversely,
if the income and gains fail to exceed the costs, earnings or net asset value
would decline faster than otherwise would be the case.
RESTRICTED SECURITIES
To the extent that it invests in restricted securities, the Portfolio may be
exposed to additional risks. "Restricted" securities are those securities that
have not been registered under the Securities Act of 1933. Because they are
unregistered, only a limited number of investors are qualified to invest in such
securities, which imposes the risk that the Portfolio investing in restricted
securities may not be able to easily dispose of them. In disposing of restricted
securities the Portfolio may incur additional transaction costs in finding a
buyer or, in an extreme case, registering the security.
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SWAP AGREEMENTS
The Portfolio may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Portfolio than if the Portfolio had invested directly in
an instrument that yielded that desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount" (i.e., the return on or increase in value of
a particular dollar amount invested at a particular interest rate, in a
particular foreign currency or in a "basket" of securities representing a
particular index). Commonly used swap agreements include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap";
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor"; and interest rate collars, under which a party
sells a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
Whether the Portfolio's use of swap agreements will be successful in furthering
its investment objective will depend upon the investment adviser's ability to
predict whether certain types of investments will produce greater returns than
other investments. Because they are two-party contracts and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid.
Moreover, the Portfolio bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. An investment adviser will cause the Portfolio to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Portfolio's
repurchase agreement guidelines. Certain restrictions imposed on the Portfolio
by the Internal Revenue Code may limit the Portfolio's ability to use swap
agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swap market and the laws
relating to swaps, including potential government regulation, could adversely
affect the Portfolio's ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, to enter into swap agreements or
could have tax consequences. (See "Tax Information" in the Statement of
Additional Information for information regarding the tax considerations relating
to swap agreements.)
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes, the Portfolio may invest without limitation in
(or enter into repurchase agreements maturing in seven days or less with U.S.
banks and broker-dealers with respect to) short-term debt securities, including
commercial paper, U.S. Treasury bills, other
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short-term U.S. Government securities, certificates of deposit and bankers'
acceptances of U.S. banks. The Portfolio also may hold cash and time deposits in
U.S. banks. In transactions involving "repurchase agreements," the Portfolio
purchases securities from a bank or broker-dealer who agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time. The
securities purchased by the Portfolio have a total value in excess of the value
of the repurchase agreement and are held by the Portfolio's custodian bank until
repurchased. See "Investment Policies" in Part B for further information about
all these securities.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations issued without any requirement for the
periodic payment of interest. Zero coupon bonds are issued at a significant
discount from the face value. The discount approximates the total amount of
interest the bonds would accrue and compound over the period until maturity at a
rate of interest reflecting the market rate at the time of issuance. Cash to pay
dividends representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Portfolio interests and from loan proceeds.
Because interest on zero coupon obligations is not paid to the Portfolio on a
current basis but is in effect compounded, the value of the securities of this
type is subject to greater fluctuations in response to changing interest rates
than the value of debt obligations that distribute income regularly. Zero coupon
bonds tend to be subject to greater market risk than interest-paying securities
of similar maturities. The discount represents income a portion of which the
Portfolio must accrue and distribute every year even though the Portfolio
receives no payment on the investment in that year.
RISK CONSIDERATIONS
Generally, when interest rates fall, the market prices of bonds rise. When rates
rise, the market prices of bonds generally fall.
Alone, the Fund is not a balanced investment plan. It is intended for long-term
investors who seek investments in markets outside the U.S. and are willing to
accept the risks of foreign investing.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer and other risks,
which is why these securities are considered speculative. (See "High Yield
Securities, for additional risks.) Investments in foreign securities could be
more volatile and more difficult to sell than U.S. investments, and involve
additional risks. (For more on risks of investing in foreign securities, see
"Description of Investment Practices and Investments--"Foreign Currency
Transactions" and "Foreign Securities.")
There are certain risks associated with investment securities with floating or
inverse floating rates of interest. (See "Description of Investment Practices
and Investments"--"Floating and Variable Rate Securities and Inverse Floaters.")
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Because the market value of the Portfolio's investments will change, the net
asset value of the Portfolio will also change. Rapid changes in interest rates
can affect bond prices significantly. The value of the securities in the
Portfolio (and, therefore, its NAV) will fluctuate in response to factors such
as (i) conditions in the securities markets, (ii) business success of the
security's issuer, (iii) creditworthiness of the issuer of the security, (iv)
changing interest rates, (v) average maturity of the Portfolio's investments,
(vi) real or perceived economic and competitive industry conditions, (vii)
foreign currency exchange rates, and (viii) other factors.
In unusual or adverse market conditions, for temporary defensive purposes, the
Portfolio may invest all or a portion of its assets in cash or cash equivalent
short-term obligations such as obligations issued or guaranteed by the U.S.
Government, any of its agencies or instrumentalities, or by any of the States;
or in money market funds, repurchase and reverse repurchase agreements, time
deposits, certificates of deposit, bankers' acceptances and commercial paper.
The Portfolio's investments in the securities of issuers located in foreign
countries may involve certain risks, such as the possible imposition of exchange
controls or other foreign governments, laws or restrictions. Because the
Portfolio may invest up to 100% of its total assets in instruments denominated
in currencies other than U.S. dollars, the Portfolio is subject to the risk that
fluctuations in the exchanges rates between the U.S. dollar and foreign
currencies may negatively affect its investments. In addition, income from
foreign securities will be received and realized in foreign currencies, and the
Portfolio is required to compute and distribute income in U.S. dollars.
Accordingly, a decline in the value of a particular foreign currency against the
U.S. dollar will reduce the dollars available to make a distribution. Similarly,
if the exchange rate declines between the time after the Portfolio's income has
been earned and computed in U.S. dollars and the time it is paid, or between the
time the Portfolio incurs expenses in U.S. dollars and the time such expenses
are paid, the Portfolio may have to liquidate portfolio securities to acquire
sufficient U.S. dollars to make a distribution. See "Considerations and Risks of
Investments in Foreign Securities" below.
CONSIDERATIONS AND RISKS OF INVESTMENTS IN FOREIGN SECURITIES.
General. Investments in foreign securities involve certain risks not associated
with domestic investing, including fluctuations in foreign exchange rates,
uncertain political and economic developments, and the possible imposition of
exchange controls or other foreign governmental laws or restrictions. Because
international investments generally involve risks in addition to those risks
associated with investments in the U.S., the Fund should be considered only as a
vehicle for international diversification and not as a complete investment
program.
Foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as economic growth rates, rates of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments positions.
Certain foreign investments may also be subject to foreign withholding taxes,
thereby reducing the income available for distribution to the Portfolio's
interestholders. Additionally, commission rates payable on foreign portfolio
transactions are generally higher than in the U.S.; accounting, auditing and
financial reporting standards differ
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from those in the U.S. and this may mean that less information about foreign
companies may be available than is generally available about issuers of
comparable securities in the U.S.; and foreign securities often trade less
frequently and with less volume than U.S. securities and consequently may
exhibit greater price volatility.
GEOGRAPHIC CONCENTRATION. The Portfolio may invest more than 25% of its total
assets in issuers located in any one country. To the extent that it invests in
issuers located in one country, the Portfolio is susceptible to factors
adversely affecting that country, including the political and economic
developments and foreign exchange rate fluctuations discussed above. As a result
of investing substantially in one country, the value of the Portfolio's assets
may fluctuate more widely than the value of shares of a comparable fund with a
lesser degree of geographic concentration.
FINANCIAL INFORMATION AND STANDARDS AND REGULATION OF ISSUERS. Issuers of
securities in foreign jurisdictions are generally not subject to the same degree
of regulation as are U.S. issuers with respect to such matters as insider
trading rules, restrictions on market manipulation, shareholder proxy
requirements and timely disclosure of information. Foreign companies may not be
subject to uniform accounting, auditing and financial reporting standards.
Often, available information about issuers and their securities is less
extensive in foreign markets, particularly emerging market countries, than in
the United States. In addition, laws in foreign countries governing business
organizations, bankruptcy and insolvency may provide less protection to security
holders such as the Portfolio than that provided by U.S. laws.
CURRENCY FLUCTUATIONS AND DEVALUATIONS. Because the Portfolio will invest in
non-U.S. dollar denominated securities, changes in foreign currency exchange
rates will affect the value of the Portfolio's investments. A decline against
the dollar in the value of currencies in which the Portfolio's investments are
denominated will result in a corresponding decline in the dollar value of its
assets. This risk tends to be heightened in the case of investing in certain
emerging market countries. For example, some currencies of emerging market
countries have experienced repeated devaluations relative to the U.S. dollar,
and major adjustments have periodically been made in certain of such currencies.
Some emerging market countries may also have managed currencies that do not
float freely against the dollar. Exchange rates are influenced generally by the
forces of supply and demand in the foreign currency markets and by numerous
other political and economic events occurring outside the United States, many of
which may be difficult, if not impossible, to predict.
The Portfolio may enter into foreign currency forward contracts to purchase or
sell foreign currencies in anticipation of its currency requirements and to
protect against possible adverse movements in foreign exchange rates. Although
such contracts may reduce the risk of loss to the Portfolio due to a decline in
the value of the currency sold, they also limit any possible gain that might
result should the value of such currency rise. See "Foreign Currency
Transactions, "Futures, Options on Futures Contracts" and "Options on Foreign
Currencies" below.
RISKS OF EMERGING MARKETS. In any emerging market country, there is the
possibility of expropriation of assets, confiscatory taxation, foreign exchange
controls, foreign investment
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controls on daily stock market movements, default in foreign government
securities, political or social instability or diplomatic developments, all of
which could affect investments in those countries. The economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade.
Certain emerging market countries may restrict investment by foreign entities.
For example, some of these countries may limit the size of foreign investment in
certain issuers, require prior government approval of foreign investment, impose
additional tax on foreign investors or limit foreign investors to specific
classes of securities of an issuer that have less advantageous rights (with
regard to price or convertibility, for example) than classes available to
domiciliaries of the country. These restrictions or controls may at times limit
or preclude investment in certain securities and may increase the costs and
expenses of the Portfolio.
Emerging markets generally present a greater risk of imposition of substantial
limitations to a foreign investor's ability to repatriate investment income,
capital or the proceeds of sales of securities. In the event of expropriation,
nationalization or other confiscation, the Portfolio could lose its entire
investment in the country involved.
Several emerging market countries have experienced substantial, and in some
periods extremely high, rates of inflation in recent years. Inflation and rapid
fluctuations in inflation rates may have very negative effects on the economies
and securities markets of certain emerging market countries. Further, inflation
accounting rules in some emerging market countries require, for companies that
keep accounting records in the local currency, that certain assets and
liabilities be restated on the Trust's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain emerging market companies.
MANAGEMENT OF THE FUND
BOARDS OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Board. The business and affairs of the Portfolio are managed under the direction
of the Schroder Core II Board. The Trustees of both the Trust and Schroder Core
II (collectively the "Trusts") are Peter E. Guernsey, John I. Howell, Clarence
F. Michalis, Hermann C. Schwab and Mark J. Smith. Additional information
regarding the Trustees and executive officers of the Trust, as well as Schroder
Core II's trustees and executive officers, may be found in the SAI under the
heading "Management, Trustees and Officers."
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INVESTMENT ADVISER AND PORTFOLIO MANAGER
SCMI serves as investment adviser to the Portfolio. SCMI manages the Portfolio
and continuously reviews, supervises and administers the Portfolio's
investments. In this regard, SCMI is responsible for making decisions relating
to the Portfolio's investments and placing purchase and sale orders regarding
such investments with brokers or dealers selected by it in its discretion. For
its services with respect to the Portfolio, the Investment Advisory Agreement
between SCMI and the Trust provides that SCMI will receive a monthly advisory
fee at the annual rate of 0.50% of the Portfolio's average daily net assets,
which the Fund indirectly bears through investment in the Portfolio. SCMI has
agreed , however, to limit its fee to an annual rate of 0.00% of the Portfolio's
average daily net assets. Such fee limitation arrangement shall remain in effect
until its elimination is approved by the Board of Trustees. The Fund bears no
separate investment advisory fee directly.
SCMI is a wholly-owned U.S. subsidiary of Schroders Incorporated, the wholly-
owned U.S. holding company subsidiary of Schroders plc. Schroders plc is the
holding company parent of a large world-wide group of banks and financial
services companies (referred to as the "Schroder Group"), with associated
companies and branch and representative offices located in eighteen countries
world-wide. The Schroder Group specializes in providing investment management
services.
Mr. Michael Perelstein is primarily responsible for the day-to-day management of
the Portfolio's investment portfolio with the assistance of Mr. Mark Astley and
an investment committee. Mr. Perelstein has been a Senior Vice President of SCMI
since January 2, 1997. Prior thereto, Mr. Perelstein was a Managing Director at
MacKay-Shields. Mr. Perelstein has more than twelve years of international and
global investment experience.
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[Check Mark] SCHRODER GROUP FACTS
[World Map]
Schroder Group offers a broad selection of mutual funds from around the world.
- - Number of mutual funds: over ______
- - Assets in mutual funds: over $ 130 billion as of October 31, 1996.
- - Number of shareholder accounts: over ______
- - Number of investment analysts and portfolio managers: over ______
ADMINISTRATIVE SERVICES
On behalf of the Fund, the Trust has entered into an administrative services
contract with Schroder Advisors, 787 Seventh Avenue, 34th Floor, New York, New
York 10019. On behalf of the Portfolio, the Trust has also entered into a sub-
administration agreement with Forum, Two Portland Square, Portland, Maine 04101.
Pursuant to these agreements, Schroder Advisors and Forum provide certain
management and administrative services necessary for the Fund's operations,
other than the investment management and administrative services provided to the
Portfolio by SCMI. Schroder Advisors is compensated at the annual rate of 0.10%
of the Fund's average daily net assets. Forum is compensated at the annual rate
of 0.075% of the Fund's average daily net assets.
Schroder Advisors and Forum provide similar services to the Portfolio, for which
the Portfolio pays Schroder Advisors at the annual rate of 0.15% of the
Portfolio's average daily net assets and pays Forum at the annual rate of 0.075%
of the Portfolio's average daily net assets.
DISTRIBUTION PLAN & SHAREHOLDER SERVICES PLAN
Schroder Advisors acts as distributor of the Fund's shares. Schroder Advisors
was organized in 1989 and registered as a broker-dealer to serve as an
administrator and distributor of the Fund and other mutual funds. Under a
distribution plan, pursuant to Rule 12b-1 under the Act (the
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"Distribution Plan") adopted by the Trust on behalf of the Fund, which is in the
form of a reimbursement plan, the Trust each month may potentially reimburse
Schroder Advisors, as distributor, for costs and expenses incurred in connection
with the distribution of Advisor Shares. Such reimbursement is subject to a
limit on an annual basis to 0.50% of the Fund's average daily net assets
attributable to Advisor Shares. The Fund will not make any payments under the
Distribution Plan with respect to Advisor Shares until the Board so authorizes.
Payment or reimbursement under the Distribution Plan may be for various types of
costs, including (1) advertising expenses, (2) costs of printing prospectuses
and other materials to be given or sent to prospective investors, (3) expenses
of sales employees or agents of Schroder Advisors, including salary,
commissions, travel and related expenses in connection with the distribution of
Advisor Shares, (4) payments to broker-dealers who advise shareholders regarding
the purchase, sale, or retention of Advisor Shares, and (5) payments to banks,
trust companies, broker-dealers (other than Schroder Advisors) or other
financial organizations (collectively, "Service Organizations"). Payments to
Service Organizations under the Distribution Plan are calculated by reference to
the average daily net assets of Advisor Shares held by shareholders who have a
brokerage or other service relationship with the Service Organization. The Fund
will not be liable for distribution expenditures made by Schroder Advisors in
any given year in excess of the maximum amount payable under the Distribution
Plan in that year. Costs or expenses in excess of the per annum limit may not be
carried forward to future years. Salary expenses of sales personnel who are
responsible for marketing various shares of portfolios of the Trust may be
allocated to those portfolios, including the Advisor Shares of the Fund, that
have adopted a plan similar to that of the Fund on the basis of average daily
net assets. Travel expenses may be allocated to, or divided among, the
particular portfolios of the Trust for which they are incurred.
The Trust, on behalf of the Fund, has also adopted a shareholder service plan
(the "Shareholder Service Plan"), pursuant to which Schroder Advisors, as
administrator of the Fund, is authorized to pay Service Organizations a
servicing fee. Payments under the Shareholder Service Plan may be for various
types of services, including (1) answering customer inquiries regarding the
manner in which purchases, exchanges and redemptions of shares of the Fund may
be effected and other matters pertaining to the Fund's services, (2) providing
necessary personnel and facilities to establish and maintain shareholder
accounts and records, (3) assisting shareholders in arranging for processing
purchase, exchange and redemption transactions, (4) arranging for the wiring of
funds, (5) guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder-designated accounts, (6)
integrating periodic statements with other customer transactions and (7)
providing such other related services as the shareholder may request. The
maximum amount payable under the Shareholder Services Plan is 0.25% of the
Fund's average daily net assets attributable to Advisor Shares.
Payments to Service Organizations under the Shareholder Service Plan are
calculated by reference to the average daily net assets of Advisor Shares held
by shareholders who have a brokerage or other service relationship with the
Service Organization. Some Service Organizations may impose additional or
different conditions on their clients, such as requiring their clients to invest
more than the minimum or subsequent investments specified by the Fund or
charging a direct fee for servicing. If imposed, these fees would be in addition
to any amounts which might be paid to the
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Service Organization by Schroder Advisors. Each Service Organization has agreed
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.
SERVICE ORGANIZATIONS
The Glass-Steagall Act and other applicable laws and regulations provide that
banks may not engage in the business of underwriting, selling or distributing
securities. There is currently no precedent prohibiting banks from performing
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either Federal or state regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, could prevent a bank from continuing
to perform all or part of its servicing activities. If a bank were prohibited
from so acting, its shareholder clients would be permitted to remain
shareholders of the Fund and alternative means for continuing the servicing of
such shareholders would be sought. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these
occurrences.
EXPENSES
SCMI and Schroder Advisors have voluntarily undertaken to waive a portion of
their fees or assume certain expenses of the Fund. This undertaking is designed
to place a maximum limit on total Fund expenses (excluding taxes, interest,
brokerage commissions and other portfolio transaction expenses and extraordinary
expenses) chargeable to Advisor Shares of [ ____%]of the average daily net
assets of the Fund attributable to those shares. This expense limitation cannot
be modified or withdrawn except by a majority vote of the Trustees of the Trust
who are not affiliated persons (as defined in the Act) of the Trust. If expense
reimbursements are required, they will be made on a monthly basis.
PORTFOLIO TRANSACTIONS
SCMI places orders for the purchase and sale of the Portfolio's investments with
brokers and dealers selected by SCMI in its discretion and seeks "best
execution" of such portfolio transactions. The Portfolio may 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. Commission rates for brokerage transactions
are fixed on many foreign securities exchanges, and this may cause higher
brokerage expenses to accrue to the Portfolio than would be the case for
comparable transactions effected on U.S. securities exchanges.
Subject to the Portfolio's policy of obtaining the best price consistent with
quality of execution on transactions, SCMI may employ Schroder Securities
Limited and its affiliates (collectively, "Schroder Securities") affiliates of
SCMI to effect transactions of the Portfolio on certain foreign securities
exchanges. Because of the affiliation between SCMI and Schroder Securities, the
Portfolio's payment of commissions to Schroder Securities is subject to
procedures adopted by
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Schroder Core II Board designed to ensure that such commissions will not exceed
the usual and customary brokers' commissions. No specific portion of the
Portfolio's brokerage will be directed to Schroder Securities and in no event
will Schroder Securities receive such brokerage in recognition of research
services.
Consistent with the Rules of the Association of the National Association of
Securities Dealers, Inc. and subject to seeking the most favorable price and
execution available and such other policies as the Schroder Core II Board may
determine, SCMI may consider sales of shares of the Fund or any other entity
that invests in the Portfolio as a factor in the selection of broker-dealers to
execute portfolio transactions for the Portfolio.
Although the Portfolio does not currently engage in directed brokerage
arrangements to pay expenses, it may do so in the future. These are arrangements
whereby brokers executing the Portfolio's portfolio transactions would agree to
pay designated expenses of the Portfolio if brokerage commissions generated by
the Portfolio reached certain levels. These arrangements might reduce the
Portfolio's expenses (and, indirectly, the Fund's expenses). As anticipated,
these arrangements would not materially increase the brokerage commissions paid
by the Portfolio.
CODE OF ETHICS
The Trust, Schroder Core II, SCMI, Schroder Advisors, and Schroders Incorporated
have each adopted a code of ethics that contains a policy on personal securities
transactions by "access persons," including portfolio managers and investment
analysts. That policy complies in all material respects with the recommendations
set forth in the Report of the Advisory Group on Personal Investing of the
Investment Company Institute, of which the Trust is a member.
INVESTMENTS AND REDEMPTIONS
PURCHASE OF SHARES
Investors may purchase Advisor Shares directly from the Trust. Prospectuses,
sales material and Account Applications can be obtained from the Trust or
through Forum Financial Corp., the Fund's transfer agent ("Transfer Agent").
(See "Other Information -- Shareholder Inquiries"). Investments may also be made
through Service Organizations that assist their customers in purchasing shares
of the Fund. Such Service Organizations may charge their customers a service fee
for processing orders to purchase or sell shares of the Fund. Investors wishing
to purchase shares through their accounts at a Service Organization should
contact that organization directly for appropriate instructions.
Shares of the Fund are offered at the net asset value next determined after
receipt of an order in proper form; one of the forms of payment described below
together with a completed Account Application (at the address set forth below).
The minimum initial investment is $25,000, except that the minimum for an IRA is
$2,000. The minimum subsequent investment is $2,000. The
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Trust reserves the right to waive the minimum initial investment at its
discretion. All purchase payments are invested in full and fractional shares.
The Fund is authorized to reject any purchase order.
BY MAIL. Initial and subsequent purchases may be made by mailing a check (in
U.S. dollars) payable to "Schroder International Bond Fund" to:
Schroder International Bond Fund - Advisor Shares
P.O. Box 446
Portland, Maine 04112
For initial purchases, the check must be accompanied by a completed Account
Application in proper form. Further documentation, such as corporate resolutions
and instruments of authority, may be requested from corporations,
administrators, executors, personal representatives, directors or custodians to
evidence the authority of the person or entity making the investment.
BY WIRE. Investors and Service Organizations (on behalf of their customers) may
transmit purchase payments by Federal Reserve Bank wire directly to the Fund as
follows:
Chase Manhattan Bank
New York, NY
ABA No.: 021000021
For Credit To: Forum Financial Corp.
Acct. No.: 910-2-718187
Ref.: Schroder International Bond Fund - Advisor Shares
Account of: (shareholder name)
Account Number: (shareholder account number)
The wire order must specify the name of the Fund, the Advisor Shares class, the
account name and number, address, confirmation number, amount to be wired, name
of the wiring bank and name and telephone number of the person to be contacted
in connection with the order. If the initial investment is by wire, an account
number will be assigned and an Account Application must be completed and mailed
to the Fund. Wire orders received prior to 4:00 p.m. (Eastern Time) on each day
that the New York Stock Exchange is open for trading (a "Fund Business Day")
will be processed at the net asset value determined as of that day. Wire orders
received after 4:00 p.m. (Eastern Time) will be processed at the net asset value
determined as of the next Fund Business Day. See "Net Asset Value" below.
For each shareholder of record, the Fund's Transfer Agent, as the shareholder's
agent, establishes an open account to which all shares purchased are credited,
together with any dividends and capital gain distributions that are reinvested
in additional shares. Although most shareholders elect not to receive share
certificates, certificates for full shares can be obtained by written request to
the Fund's Transfer Agent. No certificates are issued for fractional shares.
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<PAGE>
The Transfer Agent will deem an account lost if six months have passed since
correspondence to the shareholder's address of record is returned, unless the
Transfer Agent determines the shareholder's new address. When an account is
deemed lost, dividends and capital gains will be reinvested in additional
shares. In addition, the amount of any outstanding checks for dividends and
capital gains that have been returned to the Transfer Agent will be reinvested
and such checks will be canceled.
RETIREMENT PLANS
Shares of the Fund are offered in connection with tax-deferred retirement plans.
Applications forms and further information about these plans, including
applicable fees, are available upon request. Before investing in the Fund
through one of these plans, investors should consult their tax advisors.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund may be used as an investment vehicle for an IRA including SEP-IRA. An
IRA naming The First National Bank of Boston as custodian is available from the
Trust or the Transfer Agent. The minimum initial investment for an IRA is
$2,000. Under certain circumstances contributions to an IRA may be tax
deductible. IRAs are available to individuals who receive compensation or earned
income and their spouses, whether or not they are active participants in a tax-
qualified or government-approved retirement plan. An IRA contribution by an
individual who participates, or whose spouse participates, in a tax-qualified or
government-approved retirement plan may not be deductible, depending upon the
individual's income. Individuals also may establish an IRA to receive a
"rollover" contribution of distributions from another IRA or a qualified plan.
Tax advice should be obtained before effecting a rollover.
REDEMPTION OF SHARES
Shares of the Fund are redeemed at their next determined net asset value
following receipt by the Fund (at the address set forth above under "Purchase of
Shares") of a redemption request in proper form. (See "Net Asset Value.")
Redemption requests may be made between 9:00 a.m. and 6:00 p.m. (Eastern Time)
on each Fund Business Day. Redemption requests that are received prior to 4:00
p.m. (Eastern Time) will be processed at the net asset value determined as of
that day. Redemption requests that are received after 4:00 p.m. (Eastern Time)
on a Fund Business Day will be processed at the net asset value determined the
next Fund Business Day. See "Net Asset Value" below.
BY TELEPHONE. Redemption requests may be made by telephoning the Transfer Agent
at the Account Information telephone number on the cover page of this
Prospectus. A shareholder must provide the Transfer Agent with the class of
Shares, the dollar amount or number of shares to be redeemed, shareholder
account number, and some additional form of identification such as a password. A
redemption by telephone may be made only if the telephone redemption privilege
option has been elected on the Account Application or otherwise in writing. In
an effort to prevent unauthorized or fraudulent redemption requests by
telephone, reasonable procedures will be
30
<PAGE>
followed by the Transfer Agent to confirm that such instructions are genuine.
The Transfer Agent and the Trust generally will not be liable for any losses due
to unauthorized or fraudulent redemption requests, but may be liable if they do
not follow these procedures. Shares for which certificates have been issued may
not be redeemed by telephone. In times of drastic economic or market changes, it
may be difficult to make redemptions by telephone. If a shareholder cannot reach
the Transfer Agent by telephone, redemption requests may be mailed or hand-
delivered to the Transfer Agent.
BY MAIL. Redemptions may be made by letter to the Fund specifying the class of
shares, the dollar amount or number of Shares to be redeemed and the shareholder
account number. The letter must also be signed in exactly the same way the
account is registered (if there is more than one owner of the Shares, all must
sign) and, in certain cases, signatures must be guaranteed by an institution
that is acceptable to the Transfer Agent. Such institutions include certain
banks, brokers, dealers (including municipal and government securities brokers
and dealers), credit unions and savings associations. Notaries public are not
acceptable. Further documentation may be requested to evidence the authority of
the person or entity making the redemption request. Questions concerning the
need for signature guarantees or documentation of authority should be directed
to the Fund at the above address or by calling the telephone number appearing on
the cover of this Prospectus.
If Shares to be redeemed are held in certificate form, the certificates must be
enclosed with the redemption request and the assignment form on the back of the
certificates, or an assignment separate from the certificates (but accompanied
by the certificates), must be signed by all owners in exactly the same way the
owners' names are written on the face of the certificates. Requirements for
signature guarantees and/or documentation of authority as described above could
also apply. For your protection, the Fund suggests that certificates be sent by
registered mail.
ADDITIONAL REDEMPTION INFORMATION. Checks for redemption proceeds will normally
be mailed within seven days. No redemption proceeds will be mailed until checks
in payment for the purchase of the Shares to be redeemed have been cleared,
which may take up to 15 calendar days from the purchase date. Unless other
instructions are given in proper form, a check for the proceeds of a redemption
will be sent to the shareholder's address of record.
The Fund may suspend the right of redemption during any period when (i) trading
on the New York Stock Exchange is restricted or that exchange is closed, (ii)
the SEC has by order permitted such suspension, or (iii) an emergency, as
defined by rules of the SEC, exists making disposal of portfolio investments or
determination of the Fund's net asset value not reasonably practicable.
If the Trust Board determines that it would be detrimental to the best interest
of the remaining shareholders of the Fund to make payment wholly or partly in
cash, the Fund may redeem Shares in whole or in part by a distribution in kind
of portfolio securities (from the investment portfolio of the Portfolio or of
the Fund), in lieu of cash, in conformity with applicable rules of the SEC. The
Fund will, however, redeem Shares solely in cash up to the lesser of $250,000 or
1% of net assets during any 90-day period for any one shareholder. In the event
that payment for redeemed
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<PAGE>
Shares is made wholly or partly in portfolio securities, the shareholder may be
subject to additional risks and costs in converting the securities to cash. See
"Additional Purchase and Redemption Information -- Redemption in Kind" in the
SAI.
The proceeds of a redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for Federal income tax
purposes.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem Shares in any account (other than an IRA) if at any
time the account does not have a value of at least $2,000, unless the value of
the account fell below that amount solely as a result of market activity.
Shareholders will be notified that the value of the account is less than $2,000
and be allowed at least 30 days to make an additional investment to increase the
account balance to at least $2,000.
NET ASSET VALUE
The net asset value per share of the Fund is calculated separately for each
class of Shares of the Fund at 4:00 p.m. (Eastern Time), Monday through Friday,
each Fund Business Day, which excludes the following U.S. holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Net asset value per Share is calculated by
dividing the aggregate value of the Fund's assets less all Fund liabilities, if
any, by the number of Shares of the Fund outstanding.
Generally, securities held by the Portfolio that are listed on recognized stock
exchanges are valued at the last reported sale price, on the day when the
securities are valued (the "Valuation Day"), on the primary exchange on which
the securities are principally traded. Listed securities traded on recognized
stock exchanges for which there were no sales on the Valuation Day are valued at
the last sale price on the proceeding trading day or at closing mid-market
prices. Securities traded in over-the-counter markets are valued at the most
recent reported mid-market price. Other securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith using methods approved by the Schroder Core II Board.
Trading in securities on non-U.S. exchanges and over-the-counter markets may not
take place on every day that the New York Stock Exchange is open for trading.
Furthermore, trading takes place in various foreign markets on days on which the
Fund's net asset value is not calculated. If events materially affecting the
value of foreign securities occur between the time when their price is
determined and the time when net asset value is calculated, such securities will
be valued at fair value as determined in good faith by using methods approved by
the Schroder Core II Board.
All assets and liabilities of the Portfolio denominated in foreign currencies
are valued in U.S. dollars based on the exchange rate last quoted by a major
bank prior to the time when the net asset value of the Fund is calculated.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
THE FUND
The Fund intends to comply with the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable to regulated
investment companies. By complying therewith, the Fund will be relieved of
Federal income tax on that part of its investment company taxable income
(consisting generally of its share of the Portfolio's net investment income, net
short-term capital gain and gain from certain foreign currency transactions) and
net long-term capital gain that is distributed to its shareholders. The Fund
intends to distribute substantially all of its net investment income and its net
realized long-term capital gain at least annually and, therefore, intends not to
be subject to Federal income tax.
If the Fund is eligible to do so, it intends to elect to permit its shareholders
to take a credit (or a deduction) for the Fund's share of foreign income taxes
paid by the Portfolio. If the Fund makes such an election, its shareholders
would include as gross income in their Federal income tax returns both
distributions received from the Fund and the amount that the Fund advises is
their pro rata portion of foreign income taxes paid with respect to or withheld
from dividends and interest paid to the Portfolio from its foreign investments.
Shareholders then would be entitled, subject to certain limitations, to take a
foreign tax credit against their Federal income tax liability for the amount of
such foreign taxes or else to deduct such foreign taxes as an itemized deduction
from gross income. The Fund intends to declare annually and pay as a dividend
substantially all of its net investment income and net short-term capital gain
and to distribute annually any net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and net realized gains from
foreign currency transactions. The Fund also may make an additional dividend or
other distribution if necessary to avoid a 4% excise tax on certain
undistributed income and gain. Dividends and capital gain distributions on
Advisor Shares are reinvested automatically in additional Advisor Shares at net
asset value unless the shareholder has elected in the Account Application, or
otherwise in writing, to receive distributions in cash.
After every dividend and other distribution, the value of a Share declines by
the amount of the distribution. Purchases made shortly before a dividend or
other distribution include in the purchase price the amount of the distribution,
which will be returned to the investor in the form of a taxable distribution.
Dividends and other distributions paid by the Fund with respect to both classes
of its shares will be calculated in the same manner and at the same time. The
per share dividends on Advisor Shares are expected to be lower than the per
share dividends on Investor Shares as a result of any 12b-1 fees and other
compensation payable to Service Organizations for distribution assistance and
shareholder servicing for the Advisor Shares.
Dividends from the Fund's taxable income generally will be taxable to its
shareholders as ordinary income whether they are invested in additional Shares
or received in cash. Distributions by the Fund of any net capital gain
designated by the Fund as such will be taxable to a
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<PAGE>
shareholder as long-term capital gain, regardless of how long the shareholder
has held the Shares and whether they are invested in additional Shares or
received in cash. Each year the Trust will notify shareholders of the tax status
of dividends and other distributions.
As of the date of this Prospectus, and subject to changes in the tax law, a
redemption of Shares may result in taxable gain or loss to the redeeming
shareholder, depending on whether the redemption proceeds are more or less than
the shareholder's adjusted basis for the redeemed Shares. If Shares are redeemed
at a loss after being held for six months or less, the loss will be treated as a
long-term, rather than a short-term, capital loss to the extent of any capital
gain distributions received on those Shares.
The Fund must withhold 31% from dividends, capital gain distributions and
redemption proceeds payable to any individuals and certain other noncorporate
shareholders who do not furnish the Fund with a correct taxpayer identification
number. Withholding at that rate also is required from dividends and capital
gain distributions payable to such shareholders who otherwise are subject to
backup withholding. Depending on the residence of a shareholder for tax
purposes, distributions from the Fund may also be subject to state and local
taxes, including withholding taxes. Shareholders should consult their own tax
advisors as to the tax consequences of ownership of Shares in their particular
circumstances.
There are tax requirements that all funds must follow in order to avoid federal
taxation. In its effort to adhere to these requirements, the Portfolio may have
to limit its investment activity in some types of instruments.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Fund and its shareholders; see the SAI
for further information.
THE PORTFOLIO
The Portfolio will not be required to pay Federal income tax on its net
investment income and capital foreign currency gains because it is classified as
a partnership for Federal income tax purposes. All interest, dividends and gains
and losses of the Portfolio will be deemed to have been "passed through" to the
Fund in proportion to its holdings in the Portfolio, regardless of whether such
interest, dividends or gains have been distributed by the Portfolio.
The Portfolio intends to conduct its operations so as to enable the Fund to
qualify as a regulated investment company. Investment income received by the
Portfolio from sources within foreign countries may be subject to foreign income
or other taxes, which will reduce the yield on its securities.
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OTHER INFORMATION
CAPITALIZATION AND VOTING
The Trust was organized as a Maryland corporation ("Schroder Capital Funds,
Inc.") on July 30, 1969 and on January 9, 1996 was reorganized as a Delaware
business trust. The Trust has authority to issue 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 portfolios or
series (such as the Fund) and may divide portfolios or series into classes of
shares (such as the Advisor Shares), and the costs of doing so will be borne by
the Trust. The Trust currently consists of eight separate series, each of which
has separate investment objectives and policies. The Fund currently consists of
two classes of Shares.
Each share of the Fund is entitled to participate equally in dividends and other
distributions and the proceeds of any liquidation except that, due to the
differing expenses borne by the classes, dividends and liquidation proceeds for
each class will likely differ. Shares are fully paid and non-assessable, and
have no pre-emptive rights. Shareholders have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held). On matters requiring shareholder approval,
shareholders of the Trust are entitled to vote only with respect to matters that
affect the interests of the Fund or the class of shares they hold, except as
otherwise required by applicable law.
There will normally be no meetings of shareholders to elect Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. However, the holders of not less than a majority of the
outstanding shares of the Trust may remove any person serving as a Trustee and
the Trust Board will call a special meeting of shareholders to consider 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. Each share of the Fund has
equal voting rights, except that if a matter affects only the shareholders of a
particular class only shareholders of that class shall have a right to vote.
From time to time, certain shareholders may own a large percentage of the shares
of the Fund. Accordingly, those shareholders may be able to greatly affect (if
not determine) the outcome of a shareholder vote.
REPORTS
The Trust sends to each shareholder of the Fund a semi-annual report and an
audited annual report.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank, N.A. is custodian of the Fund's and of the Portfolio's
assets. Forum Financial Corp. serves as the Fund's transfer and dividend
disbursing agent.
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SHAREHOLDER INQUIRIES
Inquiries about the Fund, including its past performance, should be directed to:
Schroder International Bond Fund
P.O. Box 446
Portland, Maine 04112
Information about specific shareholder accounts may be obtained from the
Transfer Agent by calling (800) 344-8332.
FUND STRUCTURE
CLASSES OF SHARES. The Fund has two classes of shares, Investor Shares and
Advisor Shares. Investor Shares are offered by a separate prospectus to
individual investors, in most cases through Service Organizations. Advisor
Shares incur more expenses than Investor Shares. Except for certain differences,
each share of each class represents an undivided, proportionate interest in the
Fund. Each share of the Fund is entitled to participate equally in dividends and
other distributions and the proceeds of any liquidation of the Fund except that,
due to the differing expenses borne by the two classes, the amount of dividends
and other distributions will differ between the classes. Information about
Investor Shares is available from the Fund by calling Schroder Advisors at (800)
730-2932.
THE PORTFOLIO. The Fund seeks to achieve its investment objective by investing
all of its investable assets in the Portfolio, which has substantially the same
investment objective and policies as the Fund. Accordingly, the Portfolio
directly acquires its own securities and the Fund acquires an indirect interest
in those securities. The Portfolio is a separate series of Schroder Core II, a
business trust organized under the laws of the State of Delaware in December
1996. Core Trust II is registered under the Act as an open-end management
investment company and currently has one separate portfolio. The assets of the
Portfolio, a non-diversified portfolio, belong only to, and the liabilities of
the Portfolio are borne solely by, the Portfolio and no other portfolio of
Schroder Core II. Upon liquidation of the Portfolio, investors would be entitled
to share pro rata in the net assets of the Portfolio available for distribution
to investors.
The Fund's investment in the Portfolio is in the form of a non-transferable
beneficial interest. As of [FEBRUARY __ 1997, THE FUND HAD ___ ADDITIONAL
INSTITUTIONAL INVESTORS IN THE PORTFOLIO]. The Portfolio may permit other
investment companies or institutional investors to invest in it. All other
investors in the Portfolio will invest on the same terms and conditions as the
Fund and will pay a proportionate share of the Portfolio's expenses.
The Portfolio normally will not hold meetings of investors except as required by
the 1940 Act. Each investor in the Portfolio will be entitled to vote in
proportion to its relative beneficial interest in the Portfolio. On most issues
subject to a vote of investors, as required by the Act and other applicable law,
the Fund will solicit proxies from its shareholders and will vote its interest
in the Portfolio in proportion to the votes cast by its shareholders. If there
are other investors in
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<PAGE>
the Portfolio, there can be no assurance that any issue that receives a majority
of the votes cast by Fund shareholders will receive a majority of votes cast by
all investors in the Portfolio; indeed, if other investors hold a majority
interest in the Portfolio, they could have voting control of the Portfolio.
The Portfolio will not sell its shares directly to members of the general
public. Another investor in the Portfolio, such as an investment company, that
might sell its shares to members of the general public would not be required to
sell its shares at the same public offering price as the Fund and could have
different advisory and other fees and expenses than the Fund. Therefore, Fund
shareholders may have different returns than shareholders in another investment
company that invests exclusively in the Portfolio. There is currently no such
other investment company that offers its shares to members of the general
public. Information regarding any such funds in the future will be available
from Schroder Core II by calling Forum Financial Corp. at (207) 879-8903.
Under federal securities laws, any person or entity that signs a registration
statement may be liable for a misstatement or omission of a material fact in the
registration statement. Schroder Core II, its Trustees and certain of its
officers are required to sign the registration statement of the Trust and may be
required to sign the registration statements of certain other future publicly
offered investors in the Portfolio. In addition, under federal securities laws,
Schroder Core II could be liable for misstatements or omissions of a material
fact in any proxy soliciting material of a publicly offered investor in Schroder
Core II, including the Fund. Under the Trust Instrument for Schroder Core II,
each investor in the Portfolio, including the Trust, will indemnify Schroder
Core II and its Trustees and officers ("Schroder Core II Indemnitees") against
certain claims.
Indemnified claims are those brought against Schroder Core II Indemnitees but
based on a misstatement or omission of a material fact in the investor's
registration statement or proxy materials, except to the extent such claim is
based on a misstatement or omission of a material fact relating to information
about Schroder Core II in the investor's registration statement or proxy
materials that was supplied to the investor by Schroder Core II. Similarly,
Schroder Core II will indemnify each investor in the Portfolio, including the
Fund, for any claims brought against the investor with respect to the investor's
registration statement or proxy materials, to the extent the claim is based on a
misstatement or omission of a material fact relating to information about
Schroder Core II that is supplied to the investor by Schroder Core II. In
addition, each registered investment company investor in the Portfolio will
indemnify each Schroder Core II Indemnitee against any claim based on a
misstatement or omission of a material fact relating to information about a
series of the registered investment company that did not invest in Schroder Core
II. The purpose of these cross-indemnity provisions is principally to limit the
liability of Schroder Core II to information that it knows or should know and
can control. With respect to other prospectuses and other offering documents and
proxy materials of investors in Schroder Core II, its liability is similarly
limited to information about and supplied by it.
CERTAIN RISKS OF INVESTING IN THE PORTFOLIO. The Fund's investment in the
Portfolio may be affected by the actions of other large investors in the
Portfolio, if any. For example, if the
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Portfolio had a large investor other than the Fund that redeemed its interest in
the Portfolio, the Portfolio's remaining investors (including the Fund) might,
as a result, experience higher pro rata operating expenses, thereby producing
lower returns.
The Fund may withdraw its entire investment from the Portfolio at any time, if
the Board determines that it is in the best interests of the Fund and its
shareholders to do so. The Fund might withdraw, for example, if there were other
investors in the Portfolio with power to, and who did by a vote of the
shareholders of all investors (including the Fund), change the investment
objective or policies of the Portfolio in a manner not acceptable to the Board.
A withdrawal could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) by the Portfolio. That distribution could result
in a less diversified portfolio of investments for the Fund and could affect
adversely the liquidity of the Fund's portfolio. If the Fund decided to convert
those securities to cash, it usually would incur brokerage fees or other
transaction costs. If the Fund withdrew its investment from the Portfolio, the
Trust Board would consider what action might be taken, including the management
of the Fund's assets in accordance with its investment objective and policies by
SCMI, the Fund's investment adviser and subadviser, respectively, or the
investment of all of the Fund's investable assets in another pooled investment
entity having substantially the same investment objective as the Fund. The
inability of the Fund to find a suitable replacement investment, in the event
the Board decided not to permit SCMI to manage the Fund's assets, could have a
significant impact on shareholders of the Fund.
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APPENDIX A
PRIOR PERFORMANCE OF THE PORTFOLIO MANAGER
Prior to the inception of Schroder International Bond Fund, the manager of its
corresponding Portfolio, Michael Perelstein, was the manager of MainStay
International Bond Fund (the "MainStay Fund"), which had an investment
objective, policies and limitations substantially similar to those of Schroder
International Bond Portfolio. Mr. Perelstein used the same analytical methods
when identifying potential investments for that fund as he now uses for Schroder
International Bond Portfolio. Mr. Perelstein was primarily responsible for the
day-to-day management of the MainStay Fund, and no other person played a
significant role in its management. The average total return for the MainStay
Fund, and the performance of the Salomon Brothers After Tax Non-U.S. Government
Bond Index, for the one-year period ended December 31, 1996, and for a period
that approximates Mr. Perelstein's tenure as portfolio manager were as follows:
January 1, 1995 (inception)
ONE YEAR To December 31, 1996
-------- ---------------------------
MainStay
International* _______% __________%
Bond Fund
Before
deducting
maximum
sales load ______% __________%
After
deducting
maximum
sales load ______% __________%
Salomon Brothers
After Tax Non-U.S.
Government Bond Index ______% __________%
* Mr. Perelstein was the portfolio manager of MainStay International Bond Fund
from ____ __, 199_, to December 31, 1996.
MainStay International Bond Fund is a separate fund and has different fees and
expenses than Schroder International Bond Fund. THE DATA ABOVE ARE PROVIDED TO
ILLUSTRATE THE PAST PERFORMANCE OF THE PORTFOLIO MANAGER IN MANAGING
SUBSTANTIALLY SIMILAR ACCOUNTS AS MEASURED AGAINST SPECIFIED MARKET INDICES AND
DOES NOT REPRESENT THE PERFORMANCE OF THE FUND. INVESTORS SHOULD NOT CONSIDER
THIS PERFORMANCE DATA AS AN INDICATION OF FUTURE PERFORMANCE OF THE PORTFOLIO,
OF THE FUND OR OF THE PORTFOLIO MANAGER.
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INVESTMENT ADVISER
Schroder Capital Management International Inc.
787 Seventh Avenue
New York, New York 10019
ADMINISTRATOR & DISTRIBUTOR
Schroder Fund Advisors Inc.
787 Seventh Avenue
New York, New York 10019
SUB-ADMINISTRATOR
Forum Administrative Services, LLC
Two Portland Square
Portland, Maine 04101
CUSTODIAN
The Chase Manhattan Bank, N.A.
Global Custody Division
Woolgate House, Coleman Street
London EC2P 2HD, United Kingdom
TRANSFER AND DIVIDEND DISBURSING AGENT
Forum Financial Corp.
P.O. Box 446
Portland, Maine 04112
INDEPENDENT ACCOUNTANTS
________________ L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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Table of Contents
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . .
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Adviser . . . . . . . . . . . . . . . . . . . ...
Administrator and Distributor. . . . . . . . . . . . . . . .
Purchases and Redemptions of Shares. . . . . . . . . . . . .
Dividends and Distributions. . . . . . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . . .
Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . .
INVESTMENT OBJECTIVE, POLICIES
AND RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . .
Investment Objective . . . . . . . . . . . . . . . . . . . .
Investment Policies. . . . . . . . . . . . . . . . . . . . .
Investment Restrictions. . . . . . . . . . . . . . . . . . .
Non-Diversification. . . . . . . . . . . . . . . . . . . . .
Securities, Investment Policies and. . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF INVESTMENT. . . . . . . . . . . . . . . . . .
PRACTICES AND INVESTMENTS. . . . . . . . . . . . . . . . .
Investment Types . . . . . . . . . . . . . . . . . . . . . .
Investment Restrictions. . . . . . . . . . . . . . . . . . .
Risk Considerations. . . . . . . . . . . . . . . . . . . . .
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . .
Board of Trustees. . . . . . . . . . . . . . . . . . . . . .
Investment Adviser and Portfolio Manager
Administrative Services. . . . . . . . . . . . . . . . . . .
Distribution Plan & Shareholder
Services Plan. . . . . . . . . . . . . . . . . . . . . . .
Service Organizations. . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT IN THE FUND . . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . .
Retirement Plans . . . . . . . . . . . . . . . . . . . . . .
Individual Retirement Accounts . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . .
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . .
DIVIDENDS, OTHER DISTRIBUTIONS
AND TAXES. . . . . . . . . . . . . . . . . . . . . . . . .
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
The Portfolio. . . . . . . . . . . . . . . . . . . . . . . .
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . .
Capitalization and Voting. . . . . . . . . . . . . . . . . .
Reports. . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Information. . . . . . . . . . . . . . . . . . .
Custodian and Transfer Agent . . . . . . . . . . . . . . . .
Shareholder Inquires . . . . . . . . . . . . . . . . . . . .
Fund Structure . . . . . . . . . . . . . . . . . . . . . . .
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . .
41
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SCHRODER INTERNATIONAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1997
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This Statement of Additional Information ("SAI") is not a prospectus and is only
authorized for distribution when preceded or accompanied by the current
Prospectus for the Fund dated March 1, 1997 (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. 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 below
TABLE OF CONTENTS PAGE
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . .
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . .
Performance Information . . . . . . . . . . . . . . . . . . . . . . .
Additional Purchase and Redemption Information. . . . . . . . . . . .
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . .
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT ADVISOR
Schroder Capital Management International Inc. ("SCMI")
ADMINISTRATOR AND DISTRIBUTOR
Schroder Fund Advisors, Inc. ("Schroder Advisors")
SUB-ADMINISTRATOR
Forum Administrative Services, LLC ("Forum")
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp. ("FFC")
GENERAL INFORMATION: (207) 879-8903
ACCOUNT INFORMATION: (800) 344-8332
FAX: (207) 879-6206
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[World Map]
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INTRODUCTION
Schroder International Bond Fund (the "Fund"), is a separately managed, non-
diversified series of Schroder Capital Funds (Delaware) (the "Trust"), an open-
end management investment company under the Investment Company Act of 1940 (the
"1940 Act"). The Trust currently consists of eight separate series, each of
which has different investment objectives and policies.
Schroder International Bond Fund seeks to achieve its investment objective by
investing substantially all of its assets in Schroder International Bond
Portfolio (the "Portfolio"), which in turn, invests primarily in a portfolio of
non-U.S. debt securities. The Portfolio is separate series of Schroder Capital
Funds II ("Schroder Core II"), a registered open-end management investment
company under the 1940 Act having virtually identical investment objectives and
policies as the Fund (see "Other Information - Fund Structure"). Accordingly,
the investment experience of the Fund will correspond closely with the
investment experience of the Portfolio. Of course, as with any mutual fund,
there is no assurance that the Fund or Portfolio will achieve its investment
objective.
INVESTMENT RESTRICTIONS
The following investment restrictions, except where stated to be fundamental
policies, are non-fundamental policies of the Portfolio. The policies defined as
fundamental cannot be changed without the vote of a "majority" of the
Portfolio's outstanding voting interests. Under the 1940 Act, such a "majority"
vote is defined as the vote of the holders of the lesser of (i) 67% or more of
the interests present or represented by proxy at a meeting of interestholders,
if the holders of more than 50% of the outstanding interests are present, or
(ii) more than 50% of the outstanding interests.
The following investment restrictions of the Portfolio are fundamental policies:
(a) The Portfolio is classified as a "non-diversified" investment company, as
defined under Section 5(b)(2) of the Investment Company Act of 1940.
(b) The Portfolio may not concentrate investments in any particular industry;
therefore, the Portfolio will not purchase the securities of companies in any
one industry if, thereafter, 25% or more of the Portfolio's total assets would
consist of securities of companies in that industry. This restriction does not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities (or repurchase agreements with respect thereto). An
investment of more than 25% of the Portfolio's assets in the securities of
issuers located in one country does not contravene this policy.
(c) The Portfolio may not borrow money in excess of 33-1/3% of its total assets
taken at market value (including the amount borrowed) and then only from a bank
as a temporary measure for extraordinary or emergency purposes, including to
meet redemptions or to settle securities transactions that may otherwise require
untimely dispositions of Portfolio securities.
(d) The Portfolio may not purchase or sell real estate, provided that the
Portfolio may invest in securities issued by companies which invest in real
estate or interests therein.
(e) The Portfolio may not make loans to other persons, provided that for
purposes of this restriction, entering into repurchase agreements or acquiring
any otherwise permissible debt securities shall not be deemed to be the making
of a loan.
(f) The Portfolio may not invest in commodities or commodity contracts, except
that, subject to the restrictions described in the Prospectus and elsewhere in
this SAI, the Portfolio may (i) enter into futures contracts and options on
futures contracts, (ii) enter into foreign currency forward contracts and
foreign currency options, and (iii) purchase or sell currencies on a spot or
forward basis and may enter into futures contracts on securities, currencies or
on indexes of such securities or currencies, or any other financial instruments;
and may purchase and sell options on such futures contracts.
(g) The Portfolio may not underwrite securities issued by other persons (except
to the extent that in connection with the disposition of its portfolio
investments it may be deemed to be an underwriter under U.S. securities laws).
(h) The Portfolio may not issue senior securities except to the extent permitted
by the 1940 Act.
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The following investment restrictions of the Portfolio are non-fundamental
policies:
(a) The Portfolio may not purchase or retain securities of any issuer if, to the
knowledge of the Portfolio, any of the Trustees or Officers of the Trust, or any
of the Trustees or Officers of any of the Portfolio's investment advisers,
individually own more than 1/2 of 1% of the outstanding securities of the issuer
and together own beneficially more than 5% of such issuer's securities.
(b) The Portfolio may not invest more than 5% of the value of its total assets
in securities of issuers (other than issuers of Federal agency obligations)
having a record, together with predecessors or unconditional guarantors, of less
than three years.
(c) The Portfolio may not acquire securities or invest in repurchase agreements
with respect to any securities if, as a result, more than 15% of its net assets
(taken at current value) would be invested in illiquid securities (securities
that cannot be disposed of within seven days at their then-current value) or in
repurchase agreements not entitling the holder to payment of principal within
seven days and in securities that are not readily marketable by virtue of
restrictions on the sale of such securities to the public without registration
under the Securities Act of 1933, as amended ("Restricted Securities"). This
policy does not include restricted securities that can be sold to the public in
foreign markets or that may be eligible for resale to qualified institutional
purchasers pursuant to Rule 144A under the Securities Act of 1933 that are
determined to be liquid by the Adviser pursuant to guidelines adopted by the
Trust's Board of Trustees.
(d) The Portfolio may not make investments for the purpose of exercising control
or management. (Investments by the Portfolio in wholly-owned investment entities
created under the laws of certain countries will not be deemed the making of
investments for the purpose of exercising control or management.)
(e) The Portfolio may not invest in interests in oil, gas or other mineral
exploration, resource, lease, or arbitrage transactions or development programs
but may purchase readily marketable securities of companies which operate,
invest in, or sponsor such programs.
(f) The Portfolio may not sell securities short, except for covered short sales
or unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transactions in options,
futures and forward contracts are deemed not to constitute short sales of
securities.
(g) The Portfolio may not purchase securities on margin, except that the
Portfolio may obtain such short-term credits as are necessary for the clearance
of transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute the purchase of
securities on margin;
(h) The Portfolio may not purchase warrants, valued at the lower of cost or
market, in excess of 5% of the Portfolio's net assets. Included within that
amount, but not to exceed 2% of net assets, are warrants whose underlying
securities are not traded on principal domestic or foreign exchanges. Warrants
acquired by the Portfolio in units or attached to securities are not subject to
these restrictions.
(i) The Portfolio may not acquire or retain the securities of any other
investment company if, as a result, more than 3% of such investment company's
outstanding shares would be held by the Portfolio, more than 5% of the value of
the Portfolio's total assets would be invested in shares of such investment
company or more than 10% of the value of the Portfolio's assets would be
invested in shares of investment companies in the aggregate, except in
connection with a merger, consolidation, acquisition, or reorganization.
(j) The Portfolio will not purchase more than 3% of the outstanding securities
of any closed-end investment company.
(k) The Portfolio will not purchase securities while borrowings exceed 5% of its
total assets.
Except for the policies on borrowing and illiquid securities, the percentage
restrictions described above apply only at the time of investment and require no
action by the Portfolio as a result of subsequent changes in value of the
investments or the size of the Portfolio.
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INVESTMENT POLICIES
INTRODUCTION
The Fund's investment objective and policies authorize it to invest in certain
types of securities and to engage in certain investment techniques identified in
"Investment Objective and Policies" and "Additional Investment Policies and Risk
Considerations" in the Prospectus. The Fund currently seeks to achieve its
objective by investing all of its investable assets in the Portfolio, which has
the same investment objective and policies as the Fund. Thus, the investment
policies discussed below are common to the Fund and the Portfolio, although the
text refers to the Portfolio only and the responsibilities of the Schroder Core
II Board of Trustees ("Schroder Core II Board") discussed below, apply equally
to the Trust's Board of Trustees (the "Board"). The following supplements the
discussion found in the prospectus by providing additional information or
elaborating upon the discussion with respect to certain securities and
investment techniques.
FOREIGN SECURITIES
Investment in the securities of foreign issuers may involve risks in addition to
those normally associated with investments in the securities of U.S. issuers.
There may be less publicly available information about foreign issuers than is
available for U.S. issuers, and foreign auditing, accounting and financial
reporting practices may differ from U.S. practices. Foreign securities markets
may be less active than U.S. markets, trading may be thin and, consequently,
securities prices may be more volatile. The Portfolio's investment adviser,
Schroder Capital Management International Inc. ("SCMI" or "Adviser") will, in
general, invest only in securities of companies and governments of countries
that, in its judgment, are both politically and economically stable.
Nevertheless, all foreign investments are subject to risks of foreign political
and economic instability, adverse movements in foreign exchange rates, the
imposition or tightening of exchange controls or other limitations on the
repatriation of foreign capital, and changes in foreign governmental attitudes
toward private investment, possibly leading to nationalization, increased
taxation, or confiscation of Portfolio assets.
USE OF FORWARD CONTRACTS IN FOREIGN EXCHANGE TRANSACTIONS
In order to enhance returns, manage risk, reduce trading costs, and help protect
against changes in securities prices and foreign exchange rates, the Portfolio
may invest in forward contracts to purchase or sell an agreed-upon amount of a
specified currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. Such contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. Although such contracts tend to
minimize the risk of loss due to a decline in the value of the currency that is
sold, they expose the Portfolio to the risk that the counterparty will be unable
to perform, and they tend to limit commensurately any potential gain that might
result if the value of such currency increased during the contract period.
U.S. GOVERNMENT SECURITIES
The Portfolio may invest in obligations that have remaining maturities not
exceeding one year issued or guaranteed by the U.S. Government or its agencies
or instrumentalities. Agencies and instrumentalities established or sponsored by
the U.S. Government that issue or guarantee debt include the Bank for
Cooperatives, the Export-Import Bank, the Federal Farm Credit System, the
Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, the Federal
Intermediate Credit Banks, the Federal Land Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the Student Loan
Marketing Association. Except for obligations issued by the U.S. Treasury and
the Government National Mortgage Association, none of the obligations of the
other agencies or instrumentalities referred to above is backed by the full
faith and credit of the U.S. Government.
BANK OBLIGATIONS
The Portfolio may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase in
excess of $1 billion. Such banks must be insured by the Federal Deposit
Insurance Corporation or the Federal Savings and Loan Association. The Portfolio
may also invest in certificates of deposit issued by
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foreign banks, denominated in any major foreign currency. The Portfolio will
invest in instruments issued by foreign banks that, in the view of SCMI and the
Board of Trustees of the Trust, are of creditworthiness and financial stature in
their respective countries comparable to certificates of deposit issued by U.S.
banks in which the Portfolio would invest. A certificate of deposit is an
interest-bearing negotiable certificate issued by a bank against funds deposited
in the bank. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction. Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the maturity
date.
SHORT-TERM DEBT SECURITIES
The Portfolio may invest in commercial paper ---- short-term unsecured
promissory notes issued in bearer form by bank holding companies, corporations
and finance companies. Commercial paper purchased by the Portfolio for temporary
defensive purposes may consist of direct obligations of domestic issuers that,
at the time of investment, are rated "P-1" by Moody's Investors Service, Inc.
("Moody's") or "A-1" by Standard & Poor's Ratings Services ("S&P"), or
securities that, if not rated, are issued by companies having an outstanding
debt issue currently rated 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.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements maturing in seven days or
less with U.S. banks or broker-dealers. In a typical repurchase agreement the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed-upon time and price. The repurchase
price exceeds the sale price, reflecting an agreed-upon interest rate effective
for the period the buyer owns the security subject to repurchase. The agreed-
upon rate is unrelated to the interest rate on that security. SCMI will monitor
the value of the underlying security at the time the transaction is entered into
and at all times during the term of the repurchase agreement to insure that the
value of the security always equals or exceeds the repurchase price. In the
event of default by the seller under the repurchase agreement, the Portfolio may
have difficulties in 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 creditworthiness
of those banks and dealers with which the Portfolio enters into repurchase
agreements.
BORROWING
The Portfolio may borrow from a bank up to 15% of its total assets, but only for
temporary emergency purposes. This borrowing may be unsecured. The 1940 Act
requires that the Portfolio maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Portfolio may be required to sell some
of its portfolio holdings within three days to reduce the debt and restore the
300% asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time and could cause the Portfolio to be
unable to meet certain requirements for qualification as a regulated investment
company for Federal tax purposes. To avoid the potential leveraging effects of
the Portfolio's borrowings, the Portfolio will repay any money borrowed in
excess of 5% of its total assets prior to purchasing additional securities.
Borrowing may exaggerate the effect on the Portfolio's net asset value of any
increase or decrease in the market value of the Portfolio's portfolio
securities. Money borrowed will be subject to interest costs THAT may or may not
be recovered by appreciation of the securities purchased. The Portfolio also may
be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either requirement would increase the cost of borrowing over the stated interest
rate.
REPURCHASE AGREEMENTS
The Portfolio may enter into domestic or foreign repurchase agreements with
certain sellers deemed to be creditworthy pursuant to guidelines adopted by the
Trustees. A repurchase agreement, which provides a means for the Portfolio to
earn income on uninvested cash for periods as short as overnight, is an
arrangement under which the purchaser (i.e., the Portfolio) purchases securities
(the "Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. A repurchase agreement with foreign
banks may be available with respect to government securities of the particular
foreign jurisdiction. The custody of the Obligation will be maintained by the
Portfolio's Custodian. The repurchase price may be higher than the purchase
price, the difference being income to the Portfolio, or the
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purchase and repurchase prices may be the same, with interest at a stated rate
due to the Portfolio together with the repurchase price upon repurchase. In
either case, the income to the Portfolio is unrelated to the interest rate on
the Obligation subject to the repurchase agreement.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Portfolio may encounter delays and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. The Adviser seeks to minimize the risk of
loss from repurchase agreements by analyzing the creditworthiness of the seller
of the Obligation. Apart from the risk of bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the security.
However, if the market value of the Obligation subject to the repurchase
agreement becomes less than the repurchase price (including accrued interest),
the Portfolio will direct the seller of the Obligation to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement equals or exceeds the repurchase price.
ILLIQUID AND RESTRICTED SECURITIES
"Illiquid and Restricted Securities" under "Additional Investment Policies and
Risk Considerations" in the Prospectus sets forth the circumstances in which the
Portfolio may invest in illiquid and 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 expenses of registration of restricted securities that are
illiquid may also be negotiated by the Portfolio with the issuer at the time
such securities are purchased by the Portfolio. When registration is required,
however, a considerable period may elapse between a decision to sell the
securities and the time to sell such securities. A similar delay might be
experienced in attempting to sell such securities pursuant to an exemption from
registration. Thus, the Portfolio may not be able to obtain as favorable a price
as that prevailing at the time of the decision
LENDING OF PORTFOLIO SECURITIES
The Portfolio may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to institutions, such
as broker-dealers, and would be required to be secured continuously by
collateral in cash, letters of credit, cash equivalents or U.S. Government
securities maintained on a current basis at an amount at least equal to 100% of
the current market value of the securities loaned. The Portfolio would have the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, the Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation from the investment of the
collateral. The Portfolio would not, however, have the right to vote any
securities having voting rights during the existence of the loan, but the
Portfolio would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery of, or even loss of rights in, the
collateral should the borrower of the securities fail financially. However, the
loans would be made only to firms deemed by the Adviser to be of good standing,
and only when in the judgment of the Adviser the consideration that can be
earned justifies the attendant risk. If the Adviser determines to make
securities loans, it is intended that the value of the securities loaned would
not exceed one-third of the value of the Portfolios total assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
The Portfolio will not invest in any obligation of a domestic or foreign bank
unless (i) the bank has capital, surplus, and individual profits (as of the date
of the most recently published financial statements) in excess of $100 million
(or the equivalent in other currencies) and (ii) in the case of a U.S. bank, its
deposits are insured by the Federal Deposit Insurance Corporation. These
limitations do not prohibit investments in the securities issued by foreign
branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
FLOATING AND VARIABLE RATE SECURITIES
The interest rate on a floating rate debt instrument ("floater") is a variable
rate which is tied to another interest rate, such as a money-market index or
Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Portfolio with a certain degree of protection against rises
in interest rates, the Portfolio will participate in any declines in interest
rates as well.
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FOREIGN SECURITIES
The Portfolio may invest, without limit (subject to the other investment
policies applicable to the Portfolio) in U.S. dollar-denominated and non-dollar
denominated foreign debt securities and in certificates of deposit issued by
foreign banks and foreign branches of United States banks to any extent deemed
appropriate by the Adviser.
Investments in foreign securities may involve risks different than those
associated with investments in domestic securities due to: limited publicly
available information; non-uniform accounting standards; lower trading volume
and lower liquidity; the possible imposition of withholding, confiscatory and
other taxes; the possible adoption of foreign governmental restrictions
affecting the payment of principal and interest; changes in currency exchange
rates and currency exchange control regulations; expropriation; and other
possible adverse political or economic developments. In addition, it may be more
difficult to obtain and enforce a judgment against a foreign issuer or a foreign
branch of a domestic bank. Further, to the extent investments in foreign
securities are denominated in currencies of foreign countries, the Portfolio may
be affected favorably or unfavorably by changes in currency exchange rates and
in exchange control regulations, and may incur costs in connection with
conversion between currencies.
FIRM AND STANDBY COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Portfolio, as discussed in the Prospectus, may from time to time purchase
securities on a "when-issued," or "firm commitment" or "standby commitment"
basis. Debt securities are often issued in this manner. The price of such
securities, which may be expressed in yield terms, is fixed at the time a
commitment to purchase is made, but delivery of and payment for the when-
issued, firm or standby commitment securities take place at a later date.
Normally, settlement date occurs within one month of the purchase. During the
period between purchase and settlement, no payment is made by the Portfolio and
no interest accrues to the Portfolio. To the extent that assets of the Portfolio
are held in cash pending the settlement of a purchase of securities, the
Portfolio would earn no income; however, it is the Trust's intention that the
Portfolio will be fully invested to the extent practicable and subject to the
policies stated herein. Although when-issued, or firm or standby commitment
securities may be sold prior to the settlement date, the Trust intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons.
At the time the Trust makes the commitment on behalf of the Portfolio to
purchase a security on a when-issued, firm or standby commitment basis, it will
record the transaction and reflect the amount due and the value of the security
in determining the Portfolio's net asset value. The market value of the when-
issued, firm or standby commitment securities may be more or less than the
purchase price payable at the settlement date. The Trustees do not believe that
the Portfolio's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued or firm commitment basis. Each
Portfolio will establish a segregated account in which it will maintain liquid
assets, such as cash and U.S. Government securities or other high-grade debt
obligations, at least equal in value to any commitments to purchase securities
on a when-issued, firm or standby commitment basis. Such segregated securities
will mature or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage-related
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts, with principal payments at
maturity or specified call dates. Instead, mortgage pass-through securities
provide a monthly payment that consists of both interest and principal payments.
In effect, these payments are a "pass-through" of the monthly payments made by
the individual borrowers on their residential mortgage loans, net of any fees
paid to the issuer or guarantor of such securities. Additional payments are
caused by repayments of principal resulting from the sale of the underlying
residential property, refinancing or foreclosure, net of fees or costs that may
be incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified pass-
through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor actually makes the
payment. The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by
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institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of Federal Housing
Administration-insured or Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a government-
sponsored corporation owned entirely by private stockholders. It is subject to
general regulation by the Secretary of Housing and Urban Development. FNMA
purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers that
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and mortgage bankers. Pass-
through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. FHLMC is a corporate instrumentality of the U.S.
Government and was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. Its stock is owned by
the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("Pcs") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but Pcs are not backed by the full faith and credit of
the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the
Portfolio's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. The Portfolio will not purchase mortgage-related
securities or any other assets which in the opinion of the Portfolio's
investment adviser are illiquid if, as a result, more than 15% of the value of
the Portfolio's net assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams. CMOs are structured into multiple classes, each
bearing a different stated maturity. Actual maturity and average life will
depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
pool of mortgages according to how quickly the loans are repaid. Monthly payment
of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner-
than-desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third-party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS. FHLMC CMOs are debt obligations of
FHLMC issued in, multiple classes and having different maturity dates, that are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Pcs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking Portfolio schedule, which, in turn, is equal to approximately 100% of
Federal Housing Administration
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("FHA") prepayment experience applied to the mortgage collateral pool. All
sinking Portfolio payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking Portfolio obligation for any payment date are paid to
the holders of the CMOs as additional sinking Portfolio payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking Portfolio requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during
any semiannual payment period is not sufficient to meet FHLMC's minimum sinking
Portfolio obligation on the next sinking Portfolio payment date, FHLMC will make
up the deficiency from its general Portfolios. Criteria for the mortgage loans
in the pool backing the CMOs are identical to those of FHLMC Pcs. FHLMC has the
right to substitute collateral in the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES. The Portfolio's investment adviser expects
that governmental, government-related or private entities may create mortgage
loan pools and other mortgage-related securities offering mortgage pass-through
and mortgage-collateralized investments in addition to those described above.
The mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. As new types of mortgage-related securities are developed and
offered to investors, the Portfolio's investment adviser will, consistent with
the Portfolio's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
CMO RESIDUALS. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of or investors in mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing. The cash flow generated by the mortgage
assets underlying a series of CMOs is applied first to make required payments of
principal and interest on the CMOs and second to pay the related administrative
expenses of the issuer. The residual in a CMO structure generally represents the
interest in any excess cash flow remaining after making the foregoing payments.
Each payment of such excess cash flow to a holder of the related CMO residual
represents income and/or a return of capital. The amount of residual cash flow
resulting from a CMO will depend on, among other things, the characteristics of
the mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets, in
the same manner as an interest-only ("IO") class of stripped mortgage-backed
securities. (See "Stripped Mortgage-Backed Securities.") In addition, if a
series of a CMO includes a class that bears interest at an adjustable rate, the
yield to maturity on the related CMO residual will also be extremely sensitive
to changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances the Portfolio may fail to recoup fully its initial
investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the 1933 Act. CMO residuals, whether or not registered
under such Act, may be subject to certain restrictions on transferability, and
may be deemed "illiquid" and subject to a portfolio's limitations on investment
in illiquid securities.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"). SMBS are derivative multi-class
mortgage securities that may be issued by agencies or instrumentalities of the
U.S. Government or by private originators of or investors in mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. SMBS are usually
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A common type of SMBS
will have one class receiving some of the interest and most of the principal
from the mortgage assets, while the other class will receive most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest (the IO class), while the other class will
receive all of the principal (the principal- only or "PO" class). The yield to
maturity on an IO class is extremely
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sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Portfolio's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Like other fixed income
securities, when interest rates rise the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed income securities. The value of some mortgage-backed securities in
which the Portfolio may invest may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the Portfolio, the
ability of the Portfolio to successfully utilize these instruments may depend in
part upon the ability of the Adviser to forecast interest rates and other
economic factors correctly. If the Adviser incorrectly forecasts such factors
and has taken a position in mortgage-backed securities that is or becomes
contrary to prevailing market trends, the Portfolio could be exposed to the risk
of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly sensitive
to prevailing interest rates, the length of time the security is expected to be
outstanding, and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of mortgage-backed
securities, and the Portfolio invested in such securities wishing to sell them
may find it difficult to find a buyer, which may in turn decrease the price at
which they may be sold.
Credit risk reflects the chance that the Portfolio may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. Government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. Government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES. The Portfolio's investment adviser expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables
("CARs"). CARs represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARs are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. An investor's return on CARs may be
affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the trust may be prevented from
realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of Federal and state
bankruptcy and insolvency laws, or other factors. As a result, certificate
holders may experience delays in payments or losses if the letter of credit is
exhausted.
Consistent with the Portfolio's investment objective and policies, the Adviser
also may invest in other types of asset-backed securities. Certain asset-backed
securities may present the same types of risks that may be associated with
mortgage-backed securities.
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BRADY BONDS
The Portfolio may invest a portion of its assets in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds are not considered
U.S. Government securities.
Brady Bonds have been issued only recently, and accordingly do not have a long
payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
In light of the residual risk of Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. There can be no assurance that Brady Bonds in which the
Portfolio may invest will not be subject to restructuring arrangements or to
requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
LOAN PARTICIPATION INTERESTS
The Portfolio's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from an
agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, the Portfolio would assume all of the rights of
the lender in a corporate loan, including the right to receive payments of
principal and interest and other amounts directly from the borrower and to
enforce its rights as a lender directly against the borrower. As an alternative,
the Portfolio may purchase an assignment of all or a portion of a lender's
interest in a corporate loan, in which case, the Portfolio may be required
generally to rely on the assigning lender to demand payment and enforce its
rights against the borrower, but would otherwise be entitled to all of such
lender's rights in the corporate loan. The Portfolio also may purchase a
Participation Interest in a portion of the rights of a lender in a corporate
loan. In such a case, the Portfolio will be entitled to receive payments of
principal, interest and fees, if any, but generally will not be entitled to
enforce its rights directly against the agent bank or the borrower; rather the
Portfolio must rely on the lending institution for that purpose. The Portfolio
will not act as an agent bank, a guarantor or sole negotiator or a structure
with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation Interests, the
agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. The Portfolio
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement the Portfolio has direct recourse against the borrower
(which is unlikely), the Portfolio will rely on the agent bank to use
appropriate creditor remedies against the borrower. The agent bank also is
responsible for monitoring compliance with covenants contained in the corporate
loan agreement and for notifying holders of corporate loans of any failures of
compliance. Typically, under corporate loan agreements, the agent bank is given
broad discretion in enforcing the corporate loan agreement, and is obligated to
use only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such
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compensation may include special fees paid on structuring and funding the
corporate loan and other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Portfolio were determined
by an appropriate regulatory authority or court to be subject to the claims of
the agent bank's general or secured creditors, the Portfolio might incur certain
costs and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When the Portfolio acts as co-lender in connection with a participation interest
or when the Portfolio acquires a participation interest the terms of which
provide that the Portfolio will be in privity of contract with the corporate
borrower, the Portfolio will have direct recourse against the borrower in the
event the borrower fails to pay scheduled principal and interest. In all other
cases, the Portfolio will look to the agent bank to enforce appropriate credit
remedies against the borrower. In acquiring participation interests the
Portfolio will conduct analysis and evaluation of the financial condition of
each such co-lender and participant to ensure that the participation interest
meets the Portfolio's qualitative standards. There is a risk that there may not
be a readily available market for loan participation interests and, in some
cases, this could result in the Portfolio disposing of such securities at a
substantial discount from face value or holding such security until maturity.
When the Portfolio is required to rely upon a lending institution to pay the
Portfolio principal, interest, and other amounts received by the lending
institution for the loan participation, the Portfolio will treat both the
borrower and the lending institution as an "issuer" of the loan participation
for purposes of certain investment restrictions pertaining to the
diversification and concentration of the Portfolio's investment portfolio. The
Portfolio considers loan participation interests not subject to puts to be
illiquid.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS. The Portfolio, as discussed in the Prospectus, may sell
("write") covered call options on its portfolio securities in an attempt to
enhance investment performance. A call option sold by the Portfolio is a short-
term contract, having a duration of nine months or less, that gives the
purchaser of the option the right to buy, and the writer of the option (in
return for a premium received) the obligation to sell, the underlying security
at the exercise price upon the exercise of the option at any time prior to the
expiration date, regardless of the market price of the security during the
option period. A call option may be covered by, among other things, the writer's
owning the underlying security throughout the option period, or by holding, on a
share-for-share basis, a call on the same security as the call written, where
the exercise price of the call held is equal to or less than the price of the
call written, or greater than the exercise price of a call written if the
difference is maintained by the Portfolio in cash or high-grade liquid debt
securities in a segregated account with its custodian.
The Portfolio will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Portfolio will
retain the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. The Portfolio, in writing
"American Style" call options, must assume that the call may be exercised at any
time prior to the expiration of its obligations as a writer, and that in such
circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing market
price. In contrast, "European Style" options may only be exercised on the
expiration date of the option. Covered call options and the securities
underlying such options will be listed on national securities exchanges, except
for certain transactions in options on debt securities and foreign securities.
The Portfolio may protect itself from further losses due to a decline in value
of the underlying security or from the loss of ability to profit from
appreciation by buying an identical option, in which case the purchase cost may
offset the premium. In order to do this, the Portfolio makes a "closing purchase
transaction"-- the purchase of a call option on the same security with the same
exercise price and expiration date as the covered call option which it has
previously written on any particular security. The Portfolio will realize a gain
or loss from a closing purchase transaction if the amount paid to
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purchase a call option in a closing transaction is less or more than the amount
received from the sale of the covered call option. Also, because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the closing out of a
call option is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Portfolio. When a security
is to be sold from the Portfolio's investment portfolio, the Portfolio will
first effect a closing purchase transaction so as to close out any existing
covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") that provides a secondary market for an
option with the same exercise price and expiration date. There is no assurance
that a liquid secondary market (on an Exchange or otherwise) will exist for any
particular option, or at any particular time, and for some options no secondary
market on an Exchange or otherwise may exist. If the Portfolio is unable to
effect a closing purchase transaction involving an exchange-traded option, the
Portfolio will not sell the underlying security until the option expires or the
Portfolio delivers the underlying security upon exercise. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller, and generally do
not have as much market liquidity as exchange-traded options. Therefore, a
closing purchase transaction for an over-the-counter option may in many cases
only be made with the other party to the option.
The Portfolio pays brokerage commissions and dealer spreads in connection with
writing covered call options and effecting closing purchase transactions, as
well as for purchases and sales of underlying securities. The writing of covered
call options could result in significant increases in the Portfolio's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the Portfolio may, to the extent determined
appropriate by the Adviser, engage without limitation in the writing of options
on its portfolio securities.
WRITING PUT OPTIONS. The Portfolio, as discussed in the Prospectus, may also
write covered put options. A put option written by the Portfolio is "covered" if
the Portfolio maintains liquid assets with a value equal to the exercise price
in a segregated account with its custodian. A put option is also "covered" if
the Portfolio holds on a share-for-share basis a put on the same security as the
put written, where the exercise price of the put held is equal to or greater
than the exercise price of the put written, or less than the exercise price of
the put written if the difference is maintained by the Portfolio in cash or
liquid assets in a segregated account with its custodian.
The premium that the Portfolio receives from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand, and
interest rates.
The Portfolio may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. If the Portfolio is able to enter into a closing purchase
transaction, the Portfolio will realize a profit or loss from such transaction
if the cost of such transaction is less or more than the premium received from
the writing of the option. After writing a put option, the Portfolio may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
In addition, the Portfolio, also note in the Prospectus, may also write
straddles (combinations of covered puts and calls on the same underlying
security). The extent to which the Portfolio may write covered call options and
enter into so-called "straddle" transactions involving put or call options may
be limited by the requirements of the Internal Revenue Code for qualification as
a regulated investment company and the Fund's intention to qualify as such.
PURCHASING OPTIONS. The Portfolio, as discussed in the Prospectus, may purchase
put or call options that are traded on an Exchange or in the over-the-counter
market. Options traded in the over-the-counter market may not be as actively
traded as those listed on an Exchange. Accordingly, it may be more difficult to
value such options and to be assured that they can be closed out at any time.
The Portfolio will engage in such transactions only with firms of sufficient
creditworthiness so as to minimize these risks.
The Portfolio may purchase put options on securities to protect its holdings in
an underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
with one another. The purchase of put options on securities held in the
portfolio or related to such securities will enable the Portfolio
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to preserve, at least partially, unrealized gains occurring prior to the
purchase of the option on a portfolio security without actually selling the
security. In addition, the Portfolio will continue to receive interest or
dividend income on the security.
The Portfolio may also purchase call options on securities the Portfolio intends
to purchase to protect against substantial increases in prices of such
securities pending its ability to invest in an orderly manner in such
securities. In order to terminate an option position, the Portfolio may sell put
or call options identical to those previously purchased, which could result in a
net gain or loss depending upon whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option when it was purchased.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. There can be no assurance
that viable markets will develop or continue in the United States or abroad for
options on securities. If a put or call option purchased by the Portfolio is not
sold when it has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the exercise
price, or, in the case of a call, remains less than or equal to the exercise
price, the Portfolio will not be able to exercise profitably the option and will
lose its entire investment in the option. Also, the price of a put or call
option purchased to hedge against price movements in a related security may move
more or less than the price of the related security.
OPTIONS ON FOREIGN CURRENCIES
As discussed in the Prospectus, the Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that of the
Portfolio's transactions in currency futures contracts or forward contracts. For
example, a decline in the U.S. dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
such currency declines, the Portfolio will have the right to sell such currency
for a fixed amount exceeding the market value of such currency, resulting in a
gain that may offset, in whole or in part, the negative effect of currency
depreciation on the value of the Portfolio's securities denominated in that
currency.
Conversely, if a rise is projected in the dollar value of a currency
denominating securities to be acquired (thereby increasing the cost of such
securities) the Portfolio may purchase call options on such currency. If the
value of such currency increases, the purchase of such call options enables the
Portfolio to purchase currency for a fixed amount that is less than the market
value of such currency, resulting in a gain that may offset, at least partially,
the effect of any currency-related increase in the price of securities the
Portfolio intends to acquire. As in the case of other types of options
transactions, however, the benefit the Portfolio derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options that would deprive it of some or all of
the benefits of advantageous changes in such rates.
The Portfolio may also write options on foreign currencies for hedging purposes.
For example, if the Portfolio anticipates a decline in the dollar value of
foreign currency-denominated securities due to declining exchange rates, it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received by the Portfolio.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Portfolio could
write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Portfolio to
offset such increased cost up to the amount of the premium. As in the case of
other types of options transactions, however, the writing of a foreign currency
option will constitute only a partial hedge up to the amount of the premium, and
only if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and the Portfolio would be
required to purchase or sell the underlying currency at a loss which may not be
fully offset by the amount of the premium. As a result of writing options on
foreign currencies, the Portfolio also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in currency exchange rates.
A call option written on foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that
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foreign currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A call option is also
covered if the Portfolio holds a call on the same foreign currency for the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the amount of the
difference is maintained by the Portfolio in cash and liquid assets in a
segregated account with its custodian.
Options on foreign currencies to be written or purchased by the Portfolio will
be traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the-counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option.
FUTURES TRANSACTIONS
The Portfolio may purchase and sell futures contracts on securities, interest
rates, foreign currency, and on indexes of securities to hedge against
anticipated changes in interest rates and other economic factors that might
otherwise have an adverse effect upon the value of the Portfolio's portfolio
securities. The Portfolio may also enter into such futures contracts in order to
lengthen or shorten the average maturity or duration of the Portfolio's
investment portfolio. For example, the Portfolio may purchase futures contracts
as a substitute for the purchase of longer-term debt securities to lengthen the
average duration of the Portfolio's investment portfolio of fixed-income
securities. The Portfolio may purchase and sell stock index futures to hedge its
securities portfolio with regard to market (systematic) risk (involving the
market's assessment of overall economic prospects), as distinguished from stock-
specific risk (involving the market's evaluation of the merits of the issuer of
a particular security).
The Portfolio may also purchase and sell other futures when deemed appropriate
in order to hedge the equity or non-equity portions of its portfolio. In
addition, the Portfolio may enter into contracts for the future delivery of
foreign currencies to hedge against changes in currency exchange rates. The
Portfolio may also purchase and write put and call options on futures contracts
of the type into which the Portfolio is authorized to enter and may engage in
related closing transactions. In the United States, all such futures on
securities, debt index futures, stock index futures, foreign currency futures
and related options will be traded on exchanges that are regulated by the
Commodity Futures Trading Commission ("CFTC"). Subject to compliance with
applicable CFTC rules, the Portfolio also may enter into futures contracts
traded on foreign futures exchanges as long as trading on the aforesaid foreign
futures exchanges does not subject the Portfolio to risks that are materially
greater than the risks associated with trading on U.S. exchanges.
A futures contract is an agreement to buy or sell a security or currency (or to
deliver a final cash settlement price in the case of a contract relating to an
index or otherwise not calling for physical delivery of a security or currency
at the end of trading in the contracts) for a set price in a future month. In
the United States, futures contracts are traded on boards of trade that have
been designated "contract markets" by the CFTC. Futures contracts trade on these
markets through an "open outcry" auction on the exchange floor. Currently, there
are futures contracts based on a variety of instruments, indexes and currencies.
When a purchase or sale of a futures contract is made by the Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin") as a partial guarantee of its performance under the contract. The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract and is returned to the Portfolio upon termination of the
contract if all contractual obligations have been satisfied. The Portfolio
expects to earn interest income on its initial margin deposits. A futures
contract held by the Portfolio is valued daily at the official settlement price
of the exchange on which it is traded. Each day, as the value of the security,
currency or index fluctuates, the Portfolio pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by the Portfolio but is instead a settlement
between the Portfolio and the broker of the amount one would owe the other if
the futures contract expired. In computing daily net asset value, each Portfolio
will mark to market its open futures positions.
The Portfolio is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Portfolio.
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Positions taken in the futures markets are not normally held until delivery or
final cash settlement is required, but are instead liquidated through offsetting
transactions, which may result in a gain or a loss. While futures positions
taken by the Portfolio will usually be liquidated in this manner, the Portfolio
may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Portfolio for it to do so.
A clearing organization associated with the exchange on which futures are traded
assumes responsibility for closing-out transactions and guarantees that as
between the clearing members of an exchange, the sale and purchase obligations
will be performed with regard to all positions that remain open at the
termination of the contract.
FUTURES ON DEBT SECURITIES. A futures contract on a debt security is a binding
contractual commitment which, if held to maturity, will result in an obligation
to make or accept delivery, during a particular month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities (i.e., assuming a "long" position), the Portfolio will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities (i.e., assuming a
"short" position) it will legally obligate itself to make the future delivery of
the security against payment of the agreed-upon price. Open futures positions on
debt securities will be valued at the most recent settlement price, unless such
price does not appear to the Trustees to reflect the fair value of the contract,
in which case the positions will be valued by or under the direction of the
Trustees.
Hedging by use of futures on debt securities seeks to establish more certainly
than would otherwise be possible the effective rate of return on portfolio
securities. The Portfolio may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Portfolio (or securities having characteristics similar to those
held by the Portfolio) in order to hedge against an anticipated rise in interest
rates that would adversely affect the value of the Portfolio's portfolio
securities. When hedging of this character is successful, any depreciation in
the value of investment portfolio securities will be substantially offset by
appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Portfolio
intends to purchase particular securities and it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Portfolio of
purchasing the securities will be offset, at least to some extent, by the rise
in the value of the futures position taken in anticipation of the subsequent
securities purchase. The Portfolio may also purchase futures contracts as a
substitute for the purchase of longer-term securities to lengthen the average
duration of the Portfolio's investment portfolio.
The Portfolio could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
SECURITIES INDEX FUTURES. A securities index futures contract does not require
the physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the Portfolio's securities portfolio
with regard to market (systematic) risk, as distinguished from stock-specific
risk. Similarly, the Portfolio may enter into futures on debt securities indexes
to the extent it has debt securities in its investment portfolio. By
establishing an appropriate "short" position in securities index futures, the
Portfolio may seek to protect the value of its portfolio against an overall
decline in the market for securities. Alternatively, in anticipation of a
generally rising market, the Portfolio can seek to avoid losing the benefit of
apparently low current prices by establishing a "long" position in securities
index futures and later liquidating that position as particular securities are
in fact acquired. To the extent that these hedging strategies are successful,
the Portfolio will be affected to a lesser degree by adverse overall market
price movements, unrelated to the merits of specific portfolio securities, than
would otherwise be the case. The Portfolio may also purchase futures on debt
securities or indexes as a substitute for the purchase of longer-term debt
securities to lengthen the average duration of the Portfolio's debt portfolio.
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CURRENCY FUTURES. A sale of a currency futures contract creates an obligation by
the Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by the Portfolio, as purchaser,
to take delivery of an amount of currency at a specified future time at a
specified price. The Portfolio may sell a currency futures contract if the
Adviser anticipates that exchange rates for a particular currency will fall, as
a hedge against a decline in the value of the Portfolio's securities denominated
in such currency. If the Adviser anticipates that exchange rates will rise, the
Portfolio may purchase a currency futures contract to protect against an
increase in the price of securities denominated in a particular currency the
Portfolio intends to purchase. Although the terms of currency futures contracts
specify actual delivery or receipt, in most instances the contracts are closed
out before the settlement date without the making or taking of delivery of the
currency. Closing out of a currency futures contract is effected by entering
into an offsetting purchase or sale transaction. To offset a currency futures
contract sold by the Portfolio, the Portfolio purchases a currency futures
contract for the same aggregate amount of currency and delivery date. If the
price in the sale exceeds the price in the offsetting purchase, the Portfolio is
immediately paid the difference. Similarly, to close out a currency futures
contract purchased by the Portfolio, the Portfolio sells a currency futures
contract. If the offsetting sale price exceeds the purchase price, the Portfolio
realizes a gain, and if the offsetting sale price is less than the purchase
price, the Portfolio realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of the Portfolio's
securities. The degree of correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
for hedging purposes over a short-term period. Such distortions are generally
minor and would diminish as the contract approached maturity. Another risk is
that the Adviser could be incorrect in its expectation as to the direction or
extent of various exchange rate movements or the time span within which the
movements take place.
OPTIONS ON FUTURES. For bona fide hedging and other appropriate risk management
purposes, the Portfolio may purchase and write call and put options on futures
contracts that are traded on exchanges licensed and regulated by the CFTC for
the purpose of options trading, or, subject to applicable CFTC rules, on foreign
exchanges. A "call" option on a futures contract gives the purchaser the right,
in return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price at any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to sell the
futures contract (to deliver a "long" position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a "put," the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by the Portfolio to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Portfolio purchases an option on a futures contract, it may
obtain benefits similar to those that would result if it held the futures
position itself.
The purchase of put options on futures contracts is a means of hedging the
Portfolio's investment portfolio against the risk of rising interest rates,
declining securities prices or declining exchange rates for a particular
currency. The purchase of a call option on a futures contract represents a means
of hedging against a market advance affecting securities prices or currency
exchange rates when the Portfolio is not fully invested or of lengthening the
average maturity or duration of the Portfolio's investment portfolio. Depending
on the pricing of the option compared to either the futures contract upon which
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it is based or upon the price of the underlying securities or currencies, it may
or may not be less risky than ownership of the futures contract or underlying
securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Portfolio will not be subject to a risk of
loss on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If the Portfolio writes options on futures contracts, the Portfolio will receive
a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will realize a gain in
the amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Portfolio. If the option
is exercised, the Portfolio will incur a loss in the option transaction, which
will be reduced by the amount of the premium it has received, but which may
partially offset favorable changes in the value of its portfolio securities or
the currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the underlying securities or the currencies in which
such securities are denominated. If the futures price at expiration is below the
exercise price, the Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Portfolio's holdings of securities or the currencies in which such securities
are denominated.
The writing of a put option on a futures contract is analogous to the purchase
of a futures contract. For example, if the Portfolio writes a put option on a
futures contract on debt securities related to securities that the Portfolio
expects to acquire and the market price of such securities increases, the net
cost to the Portfolio of the debt securities acquired by it will be reduced by
the amount of the option premium received. Of course, if market prices have
declined, the Portfolio's purchase price upon exercise may be greater than the
price at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, the Portfolio's ability to establish and close out options positions at
fairly established prices will be subject to the maintenance of a liquid market.
The Portfolio will not purchase or write options on futures contracts unless the
market for such options has sufficient liquidity such that the risks associated
with such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The Portfolio will only enter into futures contracts or related
options that are standardized and traded on a U.S. or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system. In
general, the Portfolio will engage in transactions in futures contracts and
related options only for bona fide hedging and other appropriate risk management
purposes, and not for speculation. The Portfolio will not enter into futures
contracts for which the aggregate contract amounts exceed 100% of the
Portfolio's net assets. In addition, with respect to positions in futures and
related options that do not constitute bona fide hedging positions, the
Portfolio will not enter into a futures contract of futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the- money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Portfolio may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the
Portfolio.
When selling a futures contract, the Portfolio will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Portfolio may "cover" its position by owning the
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instruments underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by holding a call option
permitting the Portfolio to purchase the same futures contract at a price no
higher than the price of the contract written by the Portfolio (or at a higher
price if the difference is maintained in liquid assets with the Portfolio's
custodian).
When selling a call option on a futures contract, the Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, equal the total
market value of the futures contract underlying the call option. Alternatively,
the Portfolio may cover its position by entering into a long position in the
same futures contract at a price no higher than the strike price of the call
option, by owning the instruments underlying the futures contract, or by holding
a separate call option permitting the Portfolio to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Portfolio.
When selling a put option on a futures contract, the Portfolio will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other high quality liquid debt securities that equal the purchase
price of the futures contract, less any margin on deposit. Alternatively, the
Portfolio may cover the position either by entering into a short position in the
same futures contract, or by owning a separate put option permitting it to sell
the same futures contract so long as the strike price of the purchased put
option is the same or higher than the strike price of the put option sold by the
Portfolio.
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Portfolio's securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities (including technical influences in futures trading
and futures options) and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Portfolio seeks to close out a futures or a futures option position, and the
Portfolio would remain obligated to meet margin requirements until the position
is closed. In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON FUTURES
CONTRACTS, AND FORWARD CURRENCY EXCHANGE CONTRACTS AND OPTIONS THEREON.
Futures contracts, options on futures contracts, options on securities,
currencies, and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets
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during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and different margin requirements
than in the United States, and (v) lesser trading volume.
SWAP AGREEMENTS
The Portfolio may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Portfolio than if the Portfolio had invested directly in
an instrument that yielded that desired return or for other portfolio management
purposes. Swap agreements are two party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," (i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index). The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations that the parties to a swap agreement have agreed to exchange. Most
swap agreements entered into by the Portfolio would calculate the obligations of
the parties to the agreement on a "net" basis. Consequently, the Portfolio's
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
The Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash or liquid assets to avoid any potential
leveraging of the Portfolio's investment portfolio. The Portfolio will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Portfolio's assets.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which includes the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the Investment Company Act of
1940, commodity pool, corporation, partnership, proprietorship, organization,
trust or other entity, employee benefit plan, governmental entity, broker-
dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
FORWARD FOREIGN CURRENCY CONTRACTS
A forward foreign currency contract (a "forward contract") is an obligation
individually negotiated and privately traded by currency traders and their
customers to purchase or sell a specific currency for an agreed price at a
future date (usually less than a year). A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
Although foreign exchange dealers do not charge a fee for commissions, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies. Although these contracts are intended to
minimize the risk of loss due to a decline in the value of the hedged
currencies, they also limit any potential gain that might result should the
value of such currencies increase.
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While the Portfolio may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates may result in poorer overall
performance for the Portfolio than if it had not engaged in such transactions.
Moreover, there may be an imperfect correlation between the Portfolio's
portfolio holdings of securities denominated in a particular currency and
forward contracts entered into by the Portfolio. Such imperfect correlation may
prevent the Portfolio from achieving the intended hedge or expose the Portfolio
to the risk of currency exchange loss.
The Portfolio will not enter into forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Portfolio to deliver an amount of currency in excess of the value of the
Portfolio's investment portfolio securities or other assets denominated in that
currency.
The Portfolio will hold cash or liquid assets in a segregated account with its
custodian in an amount equal (on a daily marked-to-market basis) to the amount
of the commitments under these contracts. At the maturity of a forward contract,
the Portfolio may either accept or make delivery of the currency specified in
the contract, or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. The Portfolio
will only enter into such a forward contract if it is expected that there will
be a liquid market in which to close out the contract. However, there can be no
assurance that a liquid market will exist in which to close a forward contract,
in which case the Portfolio may suffer a loss.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, each Adviser believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interest of the Portfolio will be served. For example, when the
Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying security transaction, the Portfolio will be able to
insulate itself from a possible loss resulting from a change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received, although the Portfolio would also forego any
gain it might have realized had rates moved in the opposite direction. This
technique is sometimes referred to as a "settlement" hedge or "transaction"
hedge.
When the Adviser believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of the Portfolio's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position hedge") will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Portfolio also may hedge the same position by using
another currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency ("proxy" hedge). The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), the
Portfolio will not enter into forward contracts to sell currency or maintain a
net exposure to such contracts if the consummation of such contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's portfolio securities or other assets denominated in
that currency (or the related currency, in the case of a "proxy" hedge).
Finally, the Portfolio may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Portfolio had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a decline
in the hedged currency, but will cause the Portfolio to assume the risk of
fluctuations in the value of the currency it purchases.
At the consummation of the forward contract, the Portfolio may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
If the Portfolio chooses to make delivery of the foreign
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currency, it may be required to obtain such currency for delivery through the
sale of portfolio securities denominated in such currency or through conversion
of other assets of the Portfolio into such currency. If the Portfolio engages in
an offsetting transaction, the Portfolio will realize a gain or a loss to the
extent that there has been a change in forward contract prices. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.
The Portfolio's dealing in forward contracts will be limited to the transactions
described above. Of course, the Portfolio is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by the Adviser. The Portfolio generally will
not enter into a forward contract with a term of greater than one year.
In cases of transactions that constitute "transaction" or "settlement" hedges or
"position" hedges (including "proxy" hedges) or "cross-currency" hedges that
involve the purchase and sale of two different foreign currencies directly
through the same forward foreign currency contact, the Portfolio may deem its
forward currency hedge position to be covered by underlying Portfolio investment
portfolio securities or may establish a Segregated Account with its Custodian in
an amount equal to the value of the Portfolio's total assets committed to the
consummation of the subject hedge. The assets in the Segregated Account will
consist of cash (denominated in U.S. dollars or foreign currency), U.S.
government securities, liquid domestic or foreign debt rated in one of the top
three categories by a U.S. nationally recognized rating organization, or any
other asset that may be deemed by the Securities and Exchange Commission's
Division of Investment Management to be permissible for such purpose. In the
case of "anticipatory" hedges and "cross-currency" hedges that involve the
purchase and sale of two different foreign currencies indirectly through
separate forward currency contracts, the Portfolio will establish a Segregated
Account with its Custodian as described above. In the event the Portfolio
establishes a Segregated Account, the Portfolio will mark-to-market the value of
the assets in the Segregated Account. If the value of the securities placed in
the separate account declines, additional cash or securities will be placed in
the account by the Portfolio on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts.
It should be realized that this method of protecting the value of the
Portfolio's investment portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. It also reduces any potential gain that may have
otherwise occurred had the currency value increased above the settlement price
of the contract.
The Portfolio's foreign currency transactions may be limited in order to allow
it to comply with the requirements of Subchapter M of the Code for qualification
as a regulated investment company.
WARRANTS
The Portfolio may not invest more than 5% of the Portfolio's net assets is
warrants, or more than 2% of assets if a warrant's underlying securities are not
traded on a principal domestic or foreign exchange.
The holder of a warrant has the right to purchase a given number of shares of a
particular issuer at a specified price until expiration of the warrant. Such
investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. If a warrant is not exercised by the date of its
expiration, the Portfolio will lose its entire investment in such warrant.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which the Portfolio sells through a broker a
security it does not own in anticipation of a decline in market price. A short
sale "against the box" is a short sale in which, at the time of the short sale,
the Portfolio owns or has the right to obtain securities equivalent in kind and
amount. The Portfolio may enter into a short sale against the box to, among
other reasons, hedge against a possible market decline in the value of a
security owned, or to defer recognition of a gain or loss for federal income tax
purposes on the security owned by the Portfolio. Short sales "against the box"
will be limited to no more than 5% of the Portfolio's net assets.
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If the value of a security sold short against the box increases, the Portfolio
would suffer a loss when it purchases or delivers to the selling broker the
security sold short. If a broker with which the Portfolio has open short sales
were to become bankrupt, the Portfolio could experience losses or delays in
recovering gains on short sales. The Portfolio will only enter into short sales
against the box with brokers it believes are creditworthy.
HIGH YIELD SECURITIES
A projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield bond prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield bonds, especially in a thinly traded
market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on the Portfolio's net asset
value and investment practices. In addition, there may be special tax
considerations associated with investing in high yield bonds structured as zero
coupon or payment-in-kind securities. Interest on these securities is recorded
annually as income even though no cash interest is received until the security's
maturity or payment date. As a result, the amounts that have accrued each year
are required to be distributed to shareholders and such amounts will be taxable
to shareholders. Therefore, the Portfolio may have to sell some of its assets to
distribute cash to shareholders. These actions are likely to reduce the
Portfolio's assets and may thereby increase its expense ratios and decrease its
rate of return.
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. Thus, a particular
security may be bought or sold for certain clients even though it could have
been 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 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.
PERFORMANCE INFORMATION
The Fund may, from time to time, include quotations of its average annual total
return in advertisements or reports to shareholders or prospective investors.
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Fund over periods of 1, 5 and 10 years, calculated pursuant to the following
formula:
n
P(1+T) =ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n= the number of years, and ERV is the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of Fund expenses (net of certain
reimbursed expenses) on an annual basis, and will assume that all dividends and
distributions are reinvested when paid.
Quotations of total return will reflect only the performance of a hypothetical
investment in the Fund during the particular time period shown. Total return for
the Fund will vary based on changes in market conditions and the level of the
Fund's expenses, and no reported performance figure should be considered an
indication of future performance. Total return will be calculated separately for
each class of the Fund.
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In connection with communicating total return to current or prospective
investors, the Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to other unmanaged
indexes that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Investors who purchase and redeem shares of the Fund through a customer account
maintained at a Service Organization may be charged one or more of the following
types of fees as agreed upon by the Services Organization and the investor, with
respect to the customer services provided by the Service Organization: account
fees (a fixed amount per month or per year); transaction fees (a fixed amount
per transaction processed); compensating balance requirements (a minimum dollar
amount a customer must maintain in order to obtain the services offered); or
account maintenance fees (a periodic charge based upon a percentage of the
assets in the account or of the dividends paid on these assets). Such fees will
have the effect of reducing the average annual total return of the Fund for
those investors.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Management reserves the right to waive, in its sole discretion, the minimum
investment requirements for certain related accounts. Detailed information
pertaining to the purchase of shares of the Fund, redemption of shares and the
determination of the net asset value of Fund shares is set forth in the
Prospectus under "Investment in the Fund".
REDEMPTION IN KIND
In the event that payment for redeemed shares is made wholly or partly in
portfolio securities, brokerage costs may be incurred by the shareholder in
converting the securities to cash. An in kind distribution of portfolio
securities will be less liquid than cash. The distributee (or shareholder
receiving the distribution) may have difficulty in 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 and could affect adversely the liquidity of
the portfolio.
TAXATION OF THE FUND
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company the Fund intends to distribute to shareholders at
least 90% of its net investment income (which includes, among other items,
dividends, interest and the excess of any net short-term capital gains over net
long-term capital losses), and to meet certain diversification of asset, source
of income, and other requirements of the Code. By so doing, the Fund will not be
subject to Federal income tax on its net investment income and net realized
capital gains (the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders. If the Fund does not meet all of
these Code requirements, it will be taxed as an ordinary corporation, and its
distributions will be taxable to shareholders as ordinary income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a 4% nondeductible excise tax. To
prevent imposition of the excise tax, the Fund must distribute for each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income
(excluding any capital gains or losses) for the calendar year, (2) at least 98%
of the excess of its capital gains over capital losses realized during the one-
year period ending April 30, of such year, and (3) all such ordinary income and
capital gains for previous years that were not distributed during such years. A
distribution will be treated as paid during the calendar year if it is declared
by the Fund in October, November or December of the year with a record date in
such month and paid by the Fund during January of the following year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than in the calendar year in which the
distributions are received.
Under the Code, gains or losses attributable to exchange rate fluctuations that
occur between the time the Fund accrues interest (or other receivable) or
expenses (or other liabilities) denominated in a foreign currency and the time
the Fund actually collects such receivable or pays such liabilities generally
are treated as ordinary income or ordinary loss. Similarly, gains or losses on
disposition, of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition as well as gains or
losses from certain foreign currency transactions and options on certain foreign
currency transactions, generally are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Fund's net investment income to be
distributed to its shareholders as ordinary income.
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Generally, the hedging transactions undertaken by the Fund may be deemed
"straddles" for Federal income tax purposes. The straddle rules may affect the
character of gains or losses realized by the Fund. In addition, losses realized
by the Fund on positions that are part of a straddle may be deferred under the
straddle rules rather than being taken into account in calculating the taxable
income for the taxable year in which the losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gain realized
by the Fund that is taxed as ordinary income when distributed to shareholders.
The Fund may make one or more of the elections available under the Code that are
applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or long-
term capital gain may be increased or decreased as compared to a fund that did
not engage in such hedging transactions.
The requirements applicable to regulated investment companies such as the Fund
may limit the extent to which the Fund will be able to engage in transactions in
options and forward contracts.
Distributions of net investment income (including realized net short-term
capital gain) are taxable to shareholders as ordinary income. It is not expected
that such distributions will be eligible for the dividends-received deduction
available to corporations.
Distributions of net long-term capital gain are taxable to shareholders as long-
term capital gain, regardless of the length of time the Fund shares have been
held by a shareholder, and are not eligible for the dividends received
deduction. A loss realized by a shareholder on the sale of shares of the Fund
with respect to which capital gain dividends have been paid will, to the extent
of such capital gain dividends, be treated as long-term capital loss (even
though such shares may have been held by the shareholder for one year or less).
Further, a loss realized on a disposition will be disallowed to the extent the
shares disposed of are replaced (whether by reinvestment or distributions or
otherwise) within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
All distributions are taxable to the shareholder whether reinvested in
additional shares or received in cash. Shareholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date. Shareholders will be notified annually as to the
Federal tax status of distributions.
Distributions by the Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution nevertheless would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will receive a distribution which will nevertheless
be taxable to them.
Upon redemption or sale of his shares, a shareholder will realize a taxable gain
or loss depending upon his basis in his shares. Such gain or loss generally will
be treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. Such gain or loss generally will be long-term or short-term
depending upon the shareholder's holding period for the shares.
The Fund intends to minimize foreign income and withholding taxes by investing
in obligations the payments with respect to which will be subject to minimal or
no such taxes (insofar as this objective is consistent with the Fund's income
objective). However, since the Fund may incur foreign taxes, it intends, if it
is eligible to do so, to elect under Section 853 of the Code to treat each
shareholder as having received an additional distribution from the Fund, in the
amount indicated
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in a notice furnished to him, as his pro rata portion of income taxes paid to or
withheld by foreign governments with respect to interest, dividends and gains on
the Fund's foreign portfolio investments. The shareholder then may take the
amount of such foreign taxes paid or withheld as a credit against his Federal
income tax, subject to certain limitations. If the shareholder finds it more to
his advantage to do so, he may, in the alternative, deduct the foreign tax
withheld as an itemized deduction in computing his taxable income. Each
shareholder is referred to his tax adviser with respect to the availability of
the foreign tax credit.
The Fund will be required to report to the Internal Revenue Service (the "IRS")
all distributions and gross proceeds from the redemption of Fund shares, except
in the case of certain exempt shareholders. All such distributions and proceeds
generally will be subject to withholding of Federal income tax at a rate of 31%
("backup withholding") in the case of nonexempt shareholders if (1) the
shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number or social security number, (2) the IRS
notifies the Fund that the shareholder has failed to report certain interest and
dividend income to the IRS and to respond to notices to that effect, or (3) when
required to do so, the shareholder fails to certify that he is not subject to
backup withholding. If the withholding provisions are applicable, any such
distributions or proceeds, whether reinvested in additional shares or taken in
cash, will be reduced by the amount required to be withheld. Any amounts
withheld may be credited against the shareholder's Federal income tax liability.
Investors may wish to consult their tax advisers about the applicability of the
backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as applicable to
U.S. persons (i.e., U.S. citizens and residents and U.S. domestic corporations,
partnerships, trusts and estates). Distributions by the Fund also may be subject
to state and local taxes, and their treatment under state and local income tax
laws may differ from the Federal income tax treatment. Shareholders should
consult their tax advisors with respect to particular questions of Federal,
state and local taxation. Shareholders who are not U.S. persons should consult
their tax advisors regarding U.S. and foreign tax consequences of ownership of
shares of the Fund including the likelihood that distributions to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower rate under a tax
treaty).
MANAGEMENT
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 II.
PETER E. GUERNSEY, age 75, Oyster Bay, New York - a Trustee of the Trust and
Schroder Core II - Insurance Consultant since August 1986; prior thereto Senior
Vice President, Marsh & McLennan, Inc., insurance brokers.
JOHN I. HOWELL, age 79, Greenwich, Connecticut - a Trustee of the Trust and
Schroder Core II - Private Consultant since February 1987; Director, American
International Group, Inc.; Director, American International Life Assurance
Company of New York.
CLARENCE F. MICHALIS, age 74, 44 East 64th Street, New York, New York - a
Trustee of the Trust and Schroder Core II - Chairman of the Board of Directors,
Josiah Macy, Jr. Foundation (charitable foundation).
HERMANN C. SCHWAB, age 76, 787 Seventh Avenue, New York, New York - Chairman and
a Trustee of the Trust - retired since March, 1988; prior thereto, consultant to
SCMI since February 1, 1984.
MARK J. SMITH (b), age 34, 33 Gutter Lane, London, England - President of the
Trust - First Vice President of SCMI since April 1990; Director and Vice
President, Schroder Advisors.
ROBERT G. DAVY, age 35, 787 Seventh Avenue, New York, New York - a Vice-
President of the Trust - Director of SCMI and Schroder Capital Management
International Ltd. since 1994; First Vice President of SCMI since July, 1992;
prior thereto, employed by various affiliates of Schroders plc in various
positions in the investment research and portfolio management areas since 1986.
RICHARD R. FOULKES, age 50, 787 Seventh Avenue, New York, New York - a Vice
President of the Trust; Deputy Chairman of SCMI since October 1995; Director of
SCMI since 1979, Director of Schroder Capital Management International Ltd.
since 1989, and Executive Vice President of both of these entities.
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JOHN Y. KEFFER, age 53, 2 Portland Square, Portland, Maine - a Vice President of
the Trust. President of Forum Financial Services, Inc., the Fund's
administrator, and Forum Financial Corp., a transfer and dividend disbursing
agent and fund accountant.
JANE P. LUCAS (c), age 34, 787 Seventh Avenue, New York, New York - Vice
President of the Trust - Director and Senior Vice President SCMI; Director of
SWIS since September 1995; Director of Schroder Advisors since September 1996,
Assistant Director Schroder Investment Management Ltd. since June 1991.
CATHERINE A. MAZZA, age 37, 787 Seventh Avenue, New York, New York - a Vice
President of the Trust - Senior Vice President Schroder Advisors since December
1995; First Vice President of SCMI since March 19__, and, prior thereto, Vice
President of SCMI since October 1994; prior thereto, held various marketing
positions at Alliance Capital, an investment adviser, since July 1985.
FARIBA TALEBI, age 35, 787 Seventh Avenue, New York, New York - a 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.
JOHN A. TROIANO (b), age 37, 787 Seventh Avenue, New York, New York - a Vice
President of the Trust - Managing Director of SCMI since October 1995; Director
of Schroder Advisors since October 1992, Director and Senior Vice President of
SCMI since 1991; prior thereto, employed by various affiliates of SCMI in
various positions in the investment research and portfolio management areas
since 1981.
IRA L. UNSCHULD, age 31, 787 Seventh Avenue, New York, New York - a Vice
President of the Trust - a Vice President of SCMI since April, 1993 and an
Associate from July, 1990 to April, 1993; prior to July, 1990, employed by
various financial institutions as a securities or financial analyst.
ROBERT JACKOWITZ (b) (c), age 29, 787 Seventh Avenue, New York, New York -
Treasurer of the Trust - Vice President of SWIS since September 1995; Treasurer
of SWIS and Schroder Advisers since July 1995; Vice President of SCMI since June
1995; and Assistant Treasurer of Schroders Incorporated since January 1993.
ALEXANDRA POE, age 36, 787 Seventh Avenue, New York, New York - Secretary of
the Trust- Vice President of SCMI since August 1996; Fund Counsel and Senior
Vice President of Schroder Advisors since August 1996; prior thereto an
investment management attorney with Gordon Altman Butowsky Weitzen Shalov & Wein
since July 1994; prior thereto counsel and Vice President of Citibank, N.A.
since 1989.
CATHERINE S. WOOLEDGE, age 54, 2 Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. Prior thereto, associate at Morrison & Foerster since September
1994, prior thereto associate corporate counsel at Franklin Resources, Inc.
since September 1993, and prior thereto associate at Drinker Biddle & Reath,
Washington, D.C.
THOMAS G. SHEEHAN, age 42, 2 Portland Square, Portland, Maine - Assistant
Treasurer and Assistant Secretary of the Trust - Counsel, Forum Financial
Services, Inc. since 1993; prior thereto, Special Counsel, U.S. Securities and
Exchange Commission, Division of Investment Management, Washington, D.C.
BARBARA GOTTLIEB (c), age 42, 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Assistant Vice President of SWIS since July 1995; prior
thereto held various positions with SWIS affiliates.
GERARDO MACHADO, age 58, 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust - Associate, SCMI.
MARY KUNKEMUELLER, age 30, 787 Seventh Avenue, New York, New York - Assistant
Secretary of the Trust.
(a) Interested Trustee of the Trust within the meaning of the 1940 Act by virtue
of positions with SCMI and its affiliates.
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(b) Schroder Fund Advisors Inc. ("Schroder Advisors") is a wholly owned
subsidiary of SCMI, which is a wholly owned subsidiary of Schroders
Incorporated, which in turn is an indirect, wholly owned U.S. subsidiary of
Schroders plc.
(c) Schroder Wertheim Investment Services, Inc. ("SWIS") is a wholly owned
subsidiary of Schroder Wertheim Holdings Incorporated which is a wholly owned
subsidiary of Schroders, Incorporated, which in turn is an indirect wholly owned
U.S. subsidiary of Schroders plc.
Officers and Trustees who are interested persons of the Trust and Schroder Core
II receive no salary, fees or compensation from the Fund or the Portfolio.
Independent Trustees of the Trust and Schroder Core II receive an annual fee of
$1,000 and a fee of $250 for each meeting of the Board attended by them except
in the case of Mr. Schwab, who receives an annual fee of $1,500 and a fee of
$500 for each meeting attended. The Fund has no bonus, profit sharing, pension
or retirement plans.
As of March 1, 1997, the officers and Trustees of the Trust owned, in the
aggregate, less than 1% of the Portfolio's outstanding shares.
Although the Trust is a Delaware business trust, certain of its Trustees or
officers are residents of the United Kingdom and substantially all of their
assets may be located outside of the U.S. As a result, it may be difficult for
U.S. investors to effect service upon such persons within the United States or
to realize judgments of courts of the United States predicated upon civil
liabilities of such persons under the federal securities laws. The Trust has
been advised that there is substantial doubt as to the enforceability in the
United Kingdom of such civil remedies and criminal penalties as are afforded by
the federal securities laws. Also it is unclear if extradition treaties now in
effect between the U.S. and the United Kingdom would subject such persons to
effective enforcement of criminal penalties.
INVESTMENT ADVISOR
Schroder Capital Management International Inc. ("SCMI"), 787 Seventh Avenue, New
York, New York 10019, serves as investment adviser to the Portfolio pursuant to
an Investment Advisory Contract. SCMI is a wholly-owned U.S. subsidiary of
Schroders Incorporated, the wholly-owned U.S. holding subsidiary of Schroders
plc. Schroders plc is the holding company parent of a large worldwide group of
banks and financial service companies (referred to as the "Schroder Group"),
with associated companies and branch and representative offices located in
eighteen countries worldwide. The Schroder Group specializes in providing
investment management services and had assets under management of approximately
$130 billion as of [DECEMBER 31], 1996.
Pursuant to an Investment Advisory Agreement (the "Advisory Agreement"), SCMI is
responsible for managing the investment and reinvestment of the Portfolio's
assets and for continuously reviewing, supervising and administering the
Portfolio's investments. In this regard, it is the responsibility of SCMI to
make decisions relating to the Portfolio's investments and to place purchase and
sale orders regarding such investments with brokers or dealers selected by it in
its discretion. SCMI also furnishes to the Board periodic reports on the
investment performance of the Portfolio.
Under the terms of the Investment Advisory Contract, SCMI is required to manage
the Portfolio's investment portfolio in accordance with applicable laws and
regulations. In making its investment decisions, SCMI does not use material
information that may be in its possession or in the possession of its
affiliates.
The Advisory Agreement will continue in effect provided such continuance is
approved annually (i) by the holders of a majority of the outstanding voting
securities of the Portfolio or by the Board and (ii) by a majority of the
Trustees who are not parties to such contract or "interested persons" (as
defined in the 1940 Act) of any such party. The Advisory Agreement may be
terminated without penalty by vote of the Trustees or the shareholders of the
Portfolio on 60 days' written notice to SCMI, or by SCMI on 60 days' written
notice to the Trust, and it will terminate automatically if assigned. The
Advisory Agreement also provides that, with respect to the Portfolio, neither
SCMI nor its personnel shall be liable for any error of judgment or mistake of
law or for any act or omission in the performance of its or their duties to the
Portfolio, except for willful misfeasance, bad faith or gross negligence in the
performance of SCMI's or their duties or by reason of reckless disregard of its
or their obligations and duties under the Advisory Agreement.
The Fund currently invests all of its [INVESTABLE] assets in the Portfolio. SCMI
will not receive an investment advisory fee with respect to the Fund so long as
the Fund remains completely invested in the Portfolio or any other investment
company. The Fund may withdraw its investment from the Portfolio at any time if
the Board determines that it is in the best
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interests of the Fund and its shareholders to do so. Accordingly, the Fund
retains SCMI as its investment advisor to manage the Fund's assets in the event
the Fund so withdraws its investment.
The Advisory Agreement between Schroder Core II and SCMI with respect to the
Portfolio is the same in all material respects as the Fund's Investment Advisory
Agreement except as to the parties, the circumstances under which fees will be
paid, the jurisdiction whose laws govern the agreement and fees payable
thereunder. For its services with respect to the Portfolio, the Investment
Advisory Agreement between SCMI and the Trust provides that SCMI will receive a
monthly advisory fee at the annual rate of 0.50% of the Portfolio's average
daily net assets, which the Fund indirectly bears through investment in the
Portfolio.. SCMI has agreed , however, to limit its fee to an annual rate of
0.00% of the Portfolio's average daily net assets. Such fee limitation
arrangement shall remain in effect until its elimination is approved by the
Board of Trustees. The Fund bear no separate investment advisory fee directly.
ADMINISTRATIVE SERVICES
On behalf of the Portfolio, the Trust has entered into an Administrative
Services Agreement with Schroder Fund Advisors Inc. ("Schroder Advisors"), 787
Seventh Avenue, 34th Floor, New York, New York 10019. Schroder Advisors is a
wholly-owned subsidiary of SCMI. On behalf of the Portfolio, the Trust has also
entered into an Sub-Administrative Services Agreement with Forum Administrative
Services, Inc. ("Forum"), Two Portland Square, Portland, Maine 04101. Pursuant
to these agreements, Schroder Advisors and Forum provide certain management and
administration services necessary for the Portfolio's operations, other than the
investment management and administrative services provided to the Portfolio by
SCMI pursuant to the Advisory Agreement, including among other things, (i)
preparation of shareholder reports and communications, (ii) regulatory
compliance, such as reports to and filings with the Securities and Exchange
Commission and state securities commissions, and (iii) general supervision of
the operation of the Portfolio, including coordination of the services performed
by the Portfolio's investment adviser, transfer agent, custodian, independent
accountants, legal counsel and others. Schroder Advisors is compensated at the
annual rate of 0.05% of the Portfolio's average daily net assets. Forum is
compensated at the annual rate of 0.05% of the Portfolio's average daily net
assets.
The administrative services agreements are terminable with respect to the
Portfolio without penalty, at any time, by vote of a majority of the Trustees of
the Trust, upon 60 days' written notice to Schroder or Forum, or upon 60 days'
notice by Schroder or Forum. The administrative services agreements will
terminate automatically in the event of their assignment.
DISTRIBUTION OF FUND SHARES
Under a Distribution Plan (the "Plan") adopted by the Fund, the Trust may pay
directly or may reimburse the Adviser (or a broker-dealer registered under the
Securities Exchange Act of 1934 -- the Investment Adviser or such registered
broker-dealer, if so designated, to be 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 the sum of (a) advertising expenses, including advertising by radio,
television, newspapers, magazines, brochures, electronic delivery, sales
literature or direct mail, (b) costs of printing, posting or otherwise
delivering prospectuses and other materials to be given or sent to prospective
investors, (c) 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 (d) payments to broker-dealers (other than
the Distributor) or other organizations (other than banks) for services rendered
in the distribution of the Fund's shares, including payments in amounts based on
the average daily value of Fund shares owned by shareholders in respect of which
the broker-dealer or organization has a distributing relationship. The Fund will
make no payments or reimbursements under the Distribution Plan until the Board
specifically so authorizes. The Fund will not be liable for distribution
expenditures made by 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 expense of sales personnel who are responsible for
marketing shares of the Fund may be allocated to various portfolios of the Trust
that have adopted a Plan similar to that of the Fund on the basis of average net
assets; travel expense is allocated to, or divided among, the particular
portfolios of the Trust for which it is incurred. The Board has concluded that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
Schroder Advisors was appointed Distributor of the Fund's shares under the Plan
pursuant to an agreement approved by the Board of Trustees of the Trust at a
meeting held on November 2, 1992. Under such agreement, Schroder Advisors is not
obligated to sell any specific amount of Fund shares.
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The Plan provides that it may not be amended to increase materially the costs
that the Fund may bear pursuant to the Plan without shareholder approval and
that other material amendments of the Plan must be approved by the Board of
Trustees, and by the Trustees who are neither "interested persons" (as defined
in the 1940 Act) of the Trust nor have any direct or indirect financial interest
in the operation of the Plan or in any related agreement ("Independent
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 Independent Trustees. The Plan
has been approved, and is subject to annual approval, by the Board of Trustees
and by the Independent Trustees, by vote cast in person at a meeting called for
the purpose of voting on the Plan. The Fund has no intention of implementing the
Distribution Plan with respect to institutional investors, and in any event will
make no payments under the Distribution Plan until the Board specifically
further so authorizes. The Plan is terminable with respect to the Fund at any
time by a vote of a majority of the Independent Trustees or by vote of the
holders of a majority of the shares of the Fund.
Schroder Advisors acts as Distributor of the Fund's shares.
SERVICE ORGANIZATIONS
The Fund may also contract with banks, trust companies, broker-dealers or other
financial organizations ("Service Organizations") to provide certain
administrative services for the Fund. The Fund may pay fees to Service
Organizations (which vary depending upon the services provided) in amounts up to
an annual rate of 0.25% of the daily net asset value of the Fund's shares owned
by shareholders with whom the Service Organization has a servicing relationship.
Services provided by Service Organization may include: providing necessary
personnel and facilities to establish and maintain certain shareholder accounts
and records; assisting in processing purchase and redemption transactions;
arranging for the wiring of funds; transmitting and receiving funds in
connection with client orders to purchase or redeem shares; verifying and
guaranteeing client signatures in connection with redemption orders, transfers
among and changes in client-designated accounts; providing periodic statements
showing a client's account balances and, to the extent practicable, integrating
such information with other client transactions; furnishing periodic and annual
statements and confirmations of all purchases and redemption's of shares in a
client's account; transmitting proxy statements, annual reports, and updating
prospectuses and other communications from the Fund to clients; and such other
services as the Fund or a client reasonably may request, to the extent permitted
by applicable statute, rule or regulation. Neither SCMI nor Schroder Advisors
will be a Service Organization or receive fees for servicing. The Fund will make
no such payments to service organizations until the Board so authorizes.
Some Service Organizations could impose additional or different conditions on
their clients, such as requiring their clients to invest more than the minimum
initial or subsequent 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
has agreed 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 from continuing to perform all or a part of its servicing
activities. If a bank were prohibited from so acting, its shareholder clients
would be permitted to remain shareholders of the Fund and alternative means for
continuing the servicing of such shareholders would be sought. In that event,
changes in the operation of the Fund might occur and a shareholder serviced by
such a bank might no longer be able to avail itself of any services then being
provided by the bank. It is not expected that shareholders would suffer any
adverse financial consequences as a result of any of these occurrences.
PORTFOLIO ACCOUNTING
Forum Financial Corp. ("FFC"), an affiliate of Forum, performs portfolio
accounting services for the Fund pursuant to a Fund Accounting Agreement with
the Trust. The Fund Accounting Agreement will continue in effect only if such
continuance is specifically approved at least annually by the Board or by a vote
of the shareholders of the Trust and in either case by a majority of the
Trustees who are not parties to the Fund Accounting Agreement or interested
persons of any such party, at a meeting called for the purpose of voting on the
Fund Accounting Agreement.
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Under its agreement, FFC prepares and maintains books and records of the Fund on
behalf of the Trust that are required to be maintained under the 1940 Act,
calculates the net asset value per share of the Fund and dividends and capital
gain distributions and prepares periodic reports to shareholders and the
Securities and Exchange Commission. For its services, FFC receives from the
Trust with respect to the Fund a fee of $36,000 per year plus, for each class of
the Fund above one, $12,000 per year. FFC is paid an additional $24,000 per year
with respect to global and international funds. In addition, FFC is paid an
additional $12,000 per year with respect to tax-free money market funds; funds
with more than 25% of their total assets invested in asset backed securities;
those with more than 100 security positions; or funds with a monthly portfolio
turnover rate of 10% or greater.
FFC is required to use its best judgment and efforts in rendering fund
accounting services and is not be liable to the Trust for any action or inaction
in the absence of bad faith, willful misconduct or gross negligence. FFC is not
responsible or liable for any failure or delay in performance of its fund
accounting obligations arising out of or caused, directly or indirectly, by
circumstances beyond its reasonable control; and the Trust has agreed to
indemnify and hold harmless FFC, its employees, agents, officers and directors
against and from any and all claims, demands, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character 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 a duly authorized officer of the Trust. 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
As compensation for the advisory, administrative and management services
rendered to the Fund, SCMI and Schroder Advisors each earn monthly fees as set
forth above. SCMI and Schroder Advisors have voluntarily undertaken to assume
certain expenses of the Fund (or waive their respective fees). This undertaking
is designed to place a limit on the maximum limit on Fund expenses (including
all fees to be paid to SCMI and Schroder Advisors but excluding taxes, interest,
brokerage commissions and other portfolio transaction expenses and extraordinary
expenses) of [0.00]% and [0.00]% of the average daily net assets of the Fund
attributable to Investor Shares and Adviser Shares, respectively. These expense
limitations cannot be withdrawn except by a majority vote of the Independent
Trustees. If expense reimbursements are required, they will be made on a monthly
basis. [SCMI WILL REIMBURSE THE FUND FOR FOUR-FIFTHS OF THE AMOUNT REQUIRED AND
SCHRODER ADVISORS, THE REMAINING ONE-FIFTH; PROVIDED, HOWEVER, THAT NEITHER SCMI
NOR SCHRODER ADVISORS WILL BE REQUIRED TO MAKE ANY REIMBURSEMENTS OR WAIVE ANY
FEES IN EXCESS OF THE FEES PAYABLE TO THEM BY THE FUND ON A MONTHLY BASIS FOR
THEIR RESPECTIVE ADVISORY AND ADMINISTRATIVE SERVICES]. This undertaking to
reimburse expenses supplements any applicable state expense limitations.
CERTAIN OF THE STATES IN WHICH THE SHARES OF THE FUND MAY BE QUALIFIED FOR SALE
IMPOSE LIMITATIONS ON THE EXPENSES OF THE FUND. IF, IN ANY FISCAL YEAR, THE
TOTAL EXPENSES OF THE FUND (EXCLUDING TAXES, INTEREST, EXPENSES UNDER THE PLAN,
BROKERAGE COMMISSIONS AND OTHER PORTFOLIO TRANSACTION EXPENSES, OTHER
EXPENDITURES THAT ARE CAPITALIZED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES AND EXTRAORDINARY EXPENSES, BUT INCLUDING THE ADVISORY AND
ADMINISTRATIVE FEES) EXCEED THE EXPENSE LIMITATIONS APPLICABLE TO THE FUND
IMPOSED BY THE SECURITIES REGULATIONS OF ANY STATE, SCMI WILL REIMBURSE THE FUND
FOR FOUR-FIFTHS OF THE EXCESS, AND SCHRODER ADVISORS, THE REMAINING ONE-FIFTH OF
THE EXCESS. AS OF THE DATE OF THIS SAI, THE FUND BELIEVES THAT THE MOST
RESTRICTIVE STATE EXPENSE LIMITATION THAT MIGHT BE APPLICABLE TO THE FUND
REQUIRES REIMBURSEMENT OF EXPENSES IN ANY YEAR THAT APPLICABLE FUND EXPENSES
EXCEED 2 1/2% OF THE FIRST $30 MILLION OF THE AVERAGE DAILY VALUE OF FUND NET
ASSETS, 2% OF THE NEXT $70 MILLION OF THE AVERAGE DAILY VALUE OF FUND NET ASSETS
AND 1 1/2% OF THE REMAINING AVERAGE DAILY VALUE OF FUND NET ASSETS.
Except for the expenses paid by SCMI or Schroder Advisors, the Fund bears all
costs of its operations.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Portfolio of negotiated brokerage commissions. Such commissions
vary among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities generally involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. Since most brokerage transactions for the Portfolio will be placed with
foreign broker-dealers, certain portfolio transaction
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costs for the Portfolio may be higher than fees for similar transactions
executed on U.S. securities exchanges. There is generally no stated commission
in the case of securities traded in the over-the-counter markets, but the price
paid by the Portfolio usually includes an undisclosed dealer commission or mark-
up. In underwritten offerings, the price paid by the Portfolio includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
The Advisory Agreement authorizes and directs SCMI to place orders for the
purchase and sale of the Portfolio's investments with brokers or dealers
selected by SCMI in its discretion and to seek "best execution" of such
portfolio transactions. SCMI places all such orders for the purchase and sale of
portfolio securities and buys and sells securities for the Portfolio 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, having
in mind the Portfolio's best interests, considers all factors it deems relevant,
including, by way of illustration, price, the size of the transaction, the
nature of the market for the security, the amount of the commission, the timing
of the transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker-dealers involved and the
quality of service rendered by the broker-dealers in other transactions.
It has for many years been a common practice in the investment advisory business
as conducted in certain countries, including the United States, 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 Portfolio'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 Securities Exchange Act of 1934 (the 1934
"Act"), SCMI may cause the Portfolio to pay a broker-dealer that provides
"brokerage and research services" (as defined in the 1934 Act) to SCMI an amount
of disclosed commission for effecting a securities transaction for the Portfolio
in excess of the commission which another broker-dealer would have charged for
effecting that transaction.
Subject to the general policies regarding allocation of portfolio brokerage as
set forth above, the Board has authorized SCMI to employ Schroder Wertheim &
Company, Incorporated ("Schroder Wertheim") an affiliate of SCMI, to effect
securities transactions of the Portfolio, on the New York Stock Exchange only,
provided certain other conditions are satisfied as described below.
Payment of brokerage commissions to Schroder Wertheim for effecting such
transactions is subject to Section 17(e) of the 1940 Act, which requires, among
other things, that commissions for transactions on a national securities
exchange paid by a registered investment company to a broker 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 will in the judgment of the officers of the Trust responsible
for making portfolio decisions and selecting brokers, be (i) at least as
favorable as commissions contemporaneously charged by Schroder Wertheim on
comparable transactions for its most favored unaffiliated customers and (ii) at
least as favorable as those that would be charged on comparable transactions by
other qualified brokers having comparable execution capability. The Board,
including a majority of the Independent Trustees, has adopted procedures
pursuant to Rule 17e-1 promulgated by the Securities and Exchange Commission
under Section 17(e) to ensure that commissions paid to Schroder Wertheim by the
Portfolio satisfy the foregoing standards. The Board will review all
transactions at least quarterly for compliance with such procedures.
The Portfolio has no understanding or arrangement to direct any specific portion
of its brokerage to Schroder Wertheim and will not direct brokerage to Schroder
Wertheim in recognition of research services.
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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 Board to
establish a series of separately managed investment portfolios, each having
different investment objectives and policies. At the time of the
recapitalization, the Trust's name was changed from "The Cheapside Dollar Fund
Limited" to "Schroder Capital Funds, Inc." On January 9, 1996, the Trust was
reorganized as a Delaware business trust. At that time, the Trust's name was
changed from "Schroder Capital Funds, Inc." to its present name. The Trust is
registered as an open-end management investment company under the Act.
Delaware law provides that shareholders shall be entitled to the same
limitations of personal liability extended to stockholders of private, for-
profit corporations. The securities regulators of some states, however, have
indicated that they and the courts in their state may decline to apply Delaware
law on this point. To guard against this risk, the Trust Instrument contains an
express disclaimer of shareholder liability for the debts, liabilities,
obligations, and expenses of the Trust. The Trust Instrument provides for
indemnification out of each series' property of any shareholder or former
shareholder held personally liable for the obligations of the series. The Trust
Instrument also provides that each series shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the series and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which Delaware law does not apply (or no contractual limitation
of liability was in effect) and the portfolio is unable to meet its obligations.
Forum believes that, in view of the above, there is no risk of personal
liability to shareholders.
CAPITALIZATION AND VOTING
The Trust has an unlimited number of authorized shares of beneficial interest.
The Board may, without shareholder approval, divide the authorized shares into
an unlimited number of separate portfolios or series (such as the Fund) and may
divide portfolios or series into classes of shares, and the costs of doing so
will be borne by the Trust. The Trust currently consists of five separate
series, each of which has separate investment objectives and policies, and five
classes, two of which pertain to the Fund.
The shares of the Trust are fully paid and nonassessable, and have no
preferences as to conversion, exchange, dividends, retirement or other features.
The shares have no preemptive rights. They have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), [then standing in his name on the books of
the Trust]. Shares of each class vote separately to approve investment advisory
agreements or changes in investment objectives and other fundamental policies
affecting the portfolio to which they pertain, but all classes vote together in
the election of Trustees and ratification of the selection of independent
accountants. Shareholders of any particular class are not entitled to vote on
any matters as to which such class are not affected.
The Trust will not hold annual meetings of shareholders. The matters considered
at an annual meeting typically include the reelection of Trustees, approval of
an investment advisory agreement, and the ratification of the selection of
independent accountants. These matters will not be submitted to shareholders
unless a meeting of shareholders is held for some other reason, such as those
indicated below. Each of the Trustees will serve until death, resignation or
removal. Vacancies will be filled by the remaining Trustees, subject to the
provisions of the 1940 Act requiring a meeting of shareholders for election of
Trustees to fill vacancies when less than a majority of Trustees then in office
have been elected by shareholders. Similarly, the selection of accountants and
renewal of investment advisory agreements for future years will be performed
annually by the Board. Future shareholder meetings will be held to elect
Trustees if required by the 1940 Act, to obtain shareholder approval of changes
in fundamental investment policies, to obtain shareholder approval of material
changes in investment advisory agreements, to select new accountants if the
employment of the Trust's accountants has been terminated, and to seek any other
shareholder approval required under the 1940 Act. The Board has the power to
call a meeting of shareholders at any time when it believes it is necessary or
appropriate. In addition, Trust Instrument provides that a special meeting of
shareholders may be called at any time for any purpose by the holders of at
least 10% of the outstanding shares entitled to be voted at such meeting.
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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 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 Board is required to provide
certain assistance if requested in writing to do so by ten or more shareholders
of record (who have been such for at least six months and hold in the aggregate
the lesser of shares of the Trust having a total net asset value of at least
$25,000 or 1% of the outstanding shares of the Trust), to help such ten or more
holders communicate with other shareholders of the Trust with a view to
obtaining the requisite signatures to request a special meeting to consider the
removal of one or more Trustees.
CUSTODIAN
The Chase Manhattan Bank, N.A., through its Global Custody Division located in
London, England, acts as custodian of the Fund's assets, but plays no role in
making decisions as to the purchase or sale of portfolio securities for the
Fund. Pursuant to rules adopted under the 1940 Act, the Fund may maintain its
foreign securities and cash in the custody of certain eligible foreign banks and
securities depositories. Selection of these foreign custodial institutions is
made by the Board of Trustees following a consideration of a number of factors,
including (but not limited to) the reliability and financial stability of the
institution; the ability of the institution to capably perform custodial
services 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 Fund
assets.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Forum Financial Corp., P.O. Box 446, Portland, Maine 04112, acts as the Fund's
transfer agent and dividend disbursing agent.
LEGAL COUNSEL
[LAW FIRM], _______, 77 Water Street, New York, New York 10005, counsel to the
Fund, passes upon certain legal matters in connection with the shares offered by
the Funds.
INDEPENDENT ACCOUNTANTS
[ACCOUNTANT] L.L.P. ("ACCOUNTANT") serves as independent accountants for the
Fund. ACCOUNTANT provides audit services and consultation in connection with
review of U.S. Securities and Exchange Commission filings. ACCOUNTANT'S address
is _______.
REGISTRATION STATEMENT
This SAI and the Prospectus do not contain all the information included in the
Fund's registration statement filed with the SEC under the 1933 Act with respect
to the securities offered hereby, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. The registration statement,
including the exhibits filed therewith, may be examined at the office of the SEC
in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other documents
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The fiscal year end of the Fund is December 31. Financial statements for the
Fund's semi-annual period and fiscal year will be distributed to shareholders of
record. The Board in the future may change the fiscal year end of the Fund.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Not Applicable
Financial Highlights.
Not Applicable
(b) EXHIBITS:
(1) Trust Instrument of Schroder Capital Funds (Delaware) (the "Trust") (filed
as Exhibit 1 to Registrant's Post-Effective Amendment No. 46 and incorporated
herein by reference).
(2) None.
(3) None.
(4) (a) Sections 2.04 and 2.06 of Registrant's Trust Instrument provide as
follows:
SECTION 2.04 TRANSFER OF SHARES. Except as otherwise provided by the Trustees,
Shares shall be transferable on the records of the Trust only by the record
holder thereof or by such record holders agent thereunto duly authorized in
writing, upon delivery to the Trustees or the Trust's transfer agent of a duly
executed instrument of transfer and such evidence of the genuineness of such
execution and authorization and of such other matters as may be required by the
Trustees. Upon such delivery the transfer shall be recorded on the register of
the Trust. Until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor the Trust, nor any transfer agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
SECTION 2.06 ESTABLISHMENT OF SERIES. The Trust created hereby shall consist of
one or more Series and separate and distinct records shall be maintained by the
Trust for each Series and the assets associated with any such Series shall be
held and accounted for separately from the assets of the Trust or any other
Series. The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of the
Shareholders of any Series of the Trust, to: establish and designate and to
change in any manner any such Series of Shares or any classes of initial or
additional Series; to fix such preferences, voting powers, rights and privileges
of such Series or classes thereof as the Trustees may from time to time
determine; to divide or combine the Shares or any Series or classes thereof into
a greater or lesser number; to classify or reclassify any issued Shares or any
Series or classes thereof into one or more Series or classes of Shares; and to
take such other action with respect to the Shares as the Trustees may deem
desirable. The establishment and designation of any
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Series shall be effective upon the adoption of a resolution by a majority of the
Trustees setting forth such establishment and designation and the relative
rights and preferences of the Shares of such Series. A Series may issue any
number of Shares, and need not issue any shares. At any time that there are no
Shares outstanding of any particular Series previously established and
designated, the Trustees may by a majority vote abolish that Series and the
establishment and designation thereof.
All references to Shares in this Trust Instrument shall be deemed to be Shares
of any or all Series, or classes thereof, as the context may require. All
provisions herein relating to the Trust shall apply equally to each Series of
the Trust, and each class thereof, except as the context otherwise requires.
Each Share of a Series of the Trust shall represent an equal beneficial interest
in the net assets of such Series. Each holder of Shares of a Series shall be
entitled to receive his pro rata share of all distributions made with respect to
such Series. Upon redemption of his Shares, such Shareholder shall be paid
solely out of the funds and property of such Series of the Trust.
(5) Form of Investment Advisory Contract between the Trust and Schroder Capital
Management International Inc. (filed as Exhibit 5 to Registrant's Post-Effective
Amendment No. 46 and incorporated herein by reference).
(6) Form of Master Distribution Contract and Supplement to be between the Trust
and Schroder Fund Advisors Inc. (filed as Exhibit 6 to Registrant's Post-
Effective Amendment No. 46 and incorporated herein by reference).
(8) Form of Global Custody Agreement to be between the Trust and The Chase
Manhattan Bank, N.A. (filed as Exhibit 8 to Registrant's Post-Effective
Amendment No. 46 and incorporated herein by reference).
(9) (a) Form of Administration Agreement with Schroder Fund Advisors Inc.
(filed as Exhibit to Registrant's Post-Effective Amendment No. 46 and
incorporated herein by reference).
(b) Form of Sub-Administration Agreement with Forum Financial Services,
Inc. (filed as Exhibit 9(b) to Registrant's Post - Effective Amendment
No. 46 and incorporated herein by reference).
(c) Form of Administrative Services Agreement with Schroder Fund Advisors
Inc. with respect to Schroder International Bond Fund (to be filed).
(d) Form of Administrative Services Agreement with Forum Administrative
Services, LLC with respect to Schroder International Bond Fund (to be
filed).
(e) Form of Transfer Agency Agreement with Forum Financial Corp. (filed as
Exhibit 9(c) to Registrant's Post-Effective Amendment No. 46 and
incorporated herein by reference).
(f) Form of Fund Accounting Agreement with Forum Financial Corp. (filed as
Exhibit 9(d) to Registrant's Post-Effective Amendment No. 46 and
incorporated herein by reference).
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(10) Opinion of Jacobs Persinger & Parker as to legality of shares to be issued
by the Trust (filed as Exhibit 10(d) to Registrant's Post - Effective Amendment
No. 46 and incorporated herein by reference).
(11) Not applicable to this filing.
(15) (a) Form of Master Distribution Plan adopted by Registrant (filed as
Exhibit 15(a) to Registrant's Post-Effective Amendment No. 46 and
incorporated herein by reference).
(b) Form of Distribution Plan Supplement (filed as Exhibit 15(b) to
Registrant's Post-Effective Amendment No. 46 and incorporated herein
by reference).
Other Exhibits:
Copies of Powers of Attorney pursuant to which Trustees have signed this Post-
Effective Amendment (filed as Other Exhibits to Post-Effective Amendment No. 45
and incorporated herein by reference).
Copy of Power of Attorney pursuant to which Mr. Jackowitz has signed this Post-
Effective Amendment (filed as an Other Exhibit to Post-Effective Amendment No.
45 and incorporated herein by reference).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Title of Class Number of Record
Holders as of
January 2, 1997
-------------- ----------------
Schroder U.S. Equity Fund 605
Schroder International Fund 1,085
Schroder U.S. Smaller Companies Fund 48
Schroder Emerging Markets Fund Institutional Portfolio 21
Schroder International Smaller Companies Fund 2
Schroder Latin America Fund 2
Schroder Global Asset Allocation Fund N/A
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ITEM 27. INDEMNIFICATION.
In accordance with Section 3803 of the Delaware Business Trust Act, SECTION 5.2
of the Registrant's Trust Instrument provides as follows:
"5.2. Indemnification.
"(a) Subject to the exceptions and limitations contained in Section (b) below:
"(i) Every person who is, or has been, a Trustee or officer of the Trust
(hereinafter referred to as a "Covered Person") shall be indemnified by the
Trust to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by them in connection with any claim,
action, suit or proceeding in which they become involved as a party or otherwise
by virtue of being or having been a Trustee or officer and against amounts paid
or incurred by them in the settlement thereof;
"(ii) The words "claim," "action," "suit," or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened while in office or thereafter, and the words
"liability" and "expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
"(b) No indemnification shall be provided hereunder to a Covered Person:
"(i) Who shall have been adjudicated by a court or body before which the
proceeding was brought (A) to be liable to the Trust or its Holders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the Covered Person's office or (B) not to have
acted in good faith in the reasonable belief that Covered Person's action was in
the best interest of the Trust; or
"(ii) In the event of a settlement, unless there has been a determination that
such Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
Trustee's or officer's office,
"(A) By the court or other body approving the settlement;
"(B) By at least a majority of those Trustees who are neither Interested Persons
of the Trust nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial-type inquiry); or
"(C) By written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Holder may, by appropriate legal proceedings, challenge any
such determination by the Trustees or by independent counsel.
"(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be a Covered
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Person and shall inure to the benefit of the heirs, executors and administrators
of such a person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered Persons, and other
persons may be entitled by contract or otherwise under law.
"(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
paragraph (a) of this Section 5.2 may be paid by the Trust or Series prior to
final disposition thereof upon receipt of an undertaking by or on behalf of such
Covered Person that such amount will be paid over by Covered Person to the Trust
or Series if it is ultimately determined that the Covered Person is not entitled
to indemnification under this Section 5.2; provided, however, that either (a)
such Covered Person shall have provided appropriate security for such
undertaking, (b) the Trust is insured against losses arising out of any such
advance payments or (c) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 5.2.
"(e) Conditional advancing of indemnification monies under this Section 5.2 for
actions based upon the 1940 Act may be made only on the following conditions:
(i) the advances must be limited to amounts used, or to be used, for the
preparation or presentation of a defense to the action, including costs
connected with the preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the recipient to repay
that amount of the advance which exceeds that amount which it is ultimately
determined that he is entitled to receive from the Trust by reason of
indemnification; and (iii) (a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which assures that
any repayments may be obtained by the Trust without delay or litigation, which
bond, insurance or other form of security must be provided by the recipient of
the advance, or (b) a majority of a quorum of the Trust's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient of
the advance ultimately will be found entitled to indemnification.
"(f) In case any Holder or former Holder of any Series shall be held to be
personally liable solely by reason of the Holder or former Holder being or
having been a Holder of that Series and not because of the Holder or former
Holder acts or omissions or for some other reason, the Holder or former Holder
(or the Holder or former Holder's heirs, executors, administrators or other
legal representatives, or, in the case of a corporation or other entity, its
corporate or other general successor) shall be entitled out of the assets
belonging to the applicable Series to be held harmless from and indemnified
against all loss and expense arising from such liability. The Trust, on behalf
of the affected Series, shall, upon request by the Holder, assume the defense of
any claim made against the Holder for any act or obligation of the Series and
satisfy any judgment thereon from the assets of the Series."
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The following are the directors and principal officers of SCMI, including their
business connections of a substantial nature. The address of each company
listed, unless otherwise noted, is 33 Gutter Lane, London EC2V 8AS, United
Kingdom. Schroder Capital Management International Limited ("Schroder Ltd.") is
a United Kingdom affiliate of SCMI which provides investment management services
international clients located principally in the United States.
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David M. Salisbury. Chief Executive Officer, Director and Chairman of
Schroder Capital; Joint Chief Executive and Director of Schroder.
Richard R. Foulkes. Senior Vice President and Managing Director of Schroder
Capital.
John A. Troiano. Managing Director and Senior Vice President. Mr. Troiano
is also a Director of Schroder Ltd.
David Gibson. Senior Vice President and Director of Schroder Capital.
Director of Schroder Wertheim Investment Services Inc.
John S. Ager. Senior Vice President and Director of Schroder Capital.
Sharon L. Haugh. Senior Vice President and Director of Schroder Capital,
Director and Chairman of Schroder Advisors Inc.
Gavin D.L. Ralston. Senior Vice President and Director of Schroder Capital.
Mark J. Smith. Senior Vice President and Director of Schroder Capital.
Robert G. Davy. Senior Vice President. Mr. Davy is also a Director of
Schroder Ltd. and an officer of open end investment companies for which
SCMI and/or its affiliates provide investment services.
Jane P. Lucas. Senior Vice President and Director of Schroder Capital;
Director of Schroder Advisors Inc.; Director of Schroder Wertheim
Investment Services, Inc.
C. John Govett. Director of Schroder Capital; Group Managing Director of
Schroder Investment Management Ltd. And Director of Schroders plc.
Phillipa J. Gould. Senior Vice President and Director of Schroder Capital.
Louise Croset. First Vice President and Director of Schroder Capital.
Abdallah Nauphal, Group Vice President and Director.
ITEM 29. PRINCIPAL UNDERWRITERS.
(A) Schroder Fund Advisors Inc., the Registrant's principal underwriter, also
serves as principal underwriter for WSIS Series Trust.
(B) Following is information with respect to each principal officer and director
of Schroder Fund Advisors Inc., the Distributor of the shares of Schroder
International Fund, Schroder U.S. Equity Fund, Schroder U.S. Smaller Companies
Fund, Schroder Emerging Markets Fund Institutional Portfolio, Schroder
International Smaller Companies Fund, Schroder International Bond Fund and
Schroder Latin American Fund (each a series of the Registrant):
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Sharon L. Haugh, Chairman and Director.
Mark J. Smith, Director and Vice President.
Jane P. Lucas, Director.
Catherine A. Mazza, President.
Alexandra Poe, Secretary, Senior Vice President and Fund Counsel.
Robert Jackowitz, Treasurer.
* Address for each is 787 Seventh Avenue, New York, New York 10019 except for
Mark J. Smith, whose address is 33 Gutter Lane, London, EC2V 8AS, United
Kingdom.
(C) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by Registrant
with respect to Schroder International Bond Fund pursuant to Section 31(a) of
the Investment Company Act of 1940 and the Rules thereunder will be maintained
at the offices of Schroder Capital Management International Inc. and Schroder
Fund Advisors Inc., 787 Seventh Avenue, New York, New York 10019, except that
certain items will be maintained at the following locations:
(a) Forum Financial Corp., Two Portland Square, Portland, Maine 04101
(shareholder records).
(b) Forum Financial Services, Inc., Two Portland Square, Portland, Maine 04101
(corporate minute book).
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
(i) Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
latter of the effective date of Registrant's Securities Act of 1933
Registration Statement relating to the prospectuses offering those shares
or the commencement of public shares of the respective shares; and,
(ii) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to shareholders
relating to the portfolio or class thereof to which the prospectus relates
upon request and without charge.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of New York, State of New York, on the 17th day of
January, 1997.
SCHRODER CAPITAL FUNDS (DELAWARE)
By: /s/ Mark J. Smith
-----------------------
Mark J. Smith
President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
the Registrant's Registration Statement has been signed below by the following
persons in the capacities indicated on the 17th day of January, 1997.
Signatures Title
---------- -----
(a) Principal Executive Officer
/s/ Mark J. Smith President
--------------------------
Mark J. Smith
(b) Principal Financial and
Accounting Officer
ROBERT JACKOWITZ* Treasurer
*By: /s/ Thomas G. Sheehan
----------------------
Thomas G. Sheehan, Attorney-in-Fact
(c) Majority of the Trustees
PETER E. GUERNSEY* Trustee
JOHN I. HOWELL* Trustee
HERMANN C. SCHWAB* Trustee
CLARENCE F. MICHALIS* Trustee
*By: /s/ Thomas G. Sheehan
----------------------
Thomas G. Sheehan, Attorney-in-Fact
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SIGNATURES
On behalf of Schroder Capital Funds II, being duly authorized, I have duly
caused this amendment to the Registration Statement of Schroder Capital Funds
(Delaware) to be signed in the City of New York, State of New York on the 17th
day of January, 1997.
SCHRODER CAPITAL FUNDS II
By: /s/ Mark J. Smith
-----------------------
Mark J. Smith
President
This amendment to the Registration Statement of Schroder Capital Funds
(Delaware) has been signed below by the following persons in the capacities
indicated on the 17th day of January, 1997.
Signatures Title
---------- -----
(a) Principal Executive Officer
/s/ Mark J. Smith President
--------------------------
Mark J. Smith
(b) Principal Financial and
Accounting Officer
ROBERT JACKOWITZ* Treasurer
*By: /s/ Thomas G. Sheehan
----------------------
Thomas G. Sheehan, Attorney-in-Fact
(c) Majority of the Trustees
PETER E. GUERNSEY* Trustee
JOHN I. HOWELL* Trustee
HERMANN C. SCHWAB* Trustee
CLARENCE F. MICHALIS* Trustee
*By: /s/ Thomas G. Sheehan
----------------------
Thomas G. Sheehan, Attorney-in-Fact
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