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STATEMENT OF ADDITIONAL INFORMATION
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The Hirtle Callaghan Trust
575 E. Swedesford Road
Wayne, PA 19087
This statement of additional information is designed to supplement information
contained in the prospectus relating to The Hirtle Callaghan Trust ("Trust"), an
open-end, diversified, series, management investment company registered under
the Investment Company Act of 1940 ("Investment Company Act"). This document,
although not a prospectus, is incorporated by reference in its entirety in the
Trust's prospectus and should be read in conjunction with the Trust's prospectus
dated September 15, 1997. A copy of that prospectus is available by contacting
the Trust at 610-254-9596.
<TABLE>
<CAPTION>
Statement of Additional Information Heading PAGE Corresponding Prospectus Heading
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<S> <C>
Management of the Trust Management of the Trust; General;
Expense Information
Further Information About the Trust's Investment Investment Objectives and Policies
Policies Investment Practices and Risk
Considerations
Hedging through the Use of Options Investment Practices and Risk
Considerations: About Hedging
Strategies
Hedging through the Use of Investment Practices and Risk
Futures Contracts and Related Instruments Considerations: About Hedging
Strategies
Hedging through the Use of Investment Practices and Risk
Currency-Related Instruments Considerations: About Hedging
Strategies
Investment Restrictions Investment Objectives and Policies
Investment Practices and Risk
Considerations
Additional Purchases and Redemption Information Purchases and Redemptions
Portfolio Transactions and Valuation Portfolio Transactions and Valuation
Dividends, Distributions and Taxes Dividends, Distributions and Taxes
Performance Information Performance Information
Financial Statements and Independent Accountants
Ratings Appendix
</TABLE>
This statement of additional information does not contain all of the information
set forth in the registration statement filed by the Trust with the Securities
and Exchange Commission under the Securities Act of 1933. Copies of the
registration statement may be obtained at a reasonable charge from the
Securities and Exchange Commission or may be examined, without charge, at its
offices in Washington, D.C.
The date of this Statement of Additional Information is September 15, 1997.
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MANAGEMENT OF THE TRUST
Trustees and Officers. The Trust's Board of Trustees ("Board") is responsible
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for the overall supervision and management of the business and affairs of the
Trust, including (i) the selection and general supervision of those investment
advisory organizations ("Investment Managers") retained by the Trust to provide
portfolio management services to each of its separate investment portfolios
(each a "Portfolio"); and (ii) for Portfolios for which more than one Investment
Manager has been retained, allocation of that Portfolio's assets among such
Investment Managers. In particular, the Board may, from time to time, allocate
portions of a Portfolio's assets between or among several Investment Managers,
each of whom may have a different investment style and/or investment selection
discipline. The Board also may reallocate a Portfolio's assets among such
Investment Managers, or terminate particular Investment Managers, if the Board
deems it appropriate to do so in order to achieve the overall objectives of the
Portfolio involved. In addition, the Board may retain additional Investment
Managers on behalf of a Portfolio subject to the approval of the shareholders of
that Portfolio in accordance with the Investment Company Act. Day-to-day
operations of the Trust are the responsibility of the Trust's officers, who are
elected by, and serve at the pleasure of, the Board. The name and principal
occupation for the past five years of each of the Trust's current officers and
trustees are set forth below; unless otherwise indicated, the business address
of each is 575 East Swedesford Road Wayne, PA 19087.
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<CAPTION>
Name, Business Address and Age Position with the Trust Principal Occupation for
the Last Five Years
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<S> <C> <C> <C>
*Donald E. Callaghan 50 Chairman of the Board of For more than the past five years,
Trustees and President Principal, Hirtle Callaghan & Co., Inc.
Ross H. Goodman 48 Trustee For more than the past five years,
Mr. Goodman has been Vice
President of American Industrial
Management & Sales, Inc.
*Jonathan J. Hirtle 44 Trustee For more than the past five years,
Principal, Hirtle Callaghan & Co., Inc.
Jarrett Burt Kling 52 Trustee For more than the past five years,
Mr. Kling has been associated with CRA
Real Estate Securities, L.P. and its
affiliate, Radnor Advisers, Inc. a
Mr. Kling is general partner of TDH II
and a special limited partner of TDH III
(venture capital limited partnerships)
since 1983.
*David M. Spungen 34 Trustee For more than the past five years,
1926 Arch Street Mr. Spungen has been associated
Philadelphia, PA 19103-1484 with The CMS Companies (financial
services).Mr. Spungen currently
serves as Director of CMS
Capital Management, (a division of CMS
Investment Resources, Inc.)
Richard W. Wortham, III 57 Trustee For more than the past five years,
President, Video Rental of
Pennsylvania, Inc. and its parent,
Houston VMC, Inc. Mr.
Wortham is also a trustee of the
Wortham Foundation and
the Museum of Fine Arts, Houston.
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Robert Zion 34 Vice President and Treasurer Mr. Zion is a Principal of Hirtle
Callaghan, and has been
employed by that firm
for more than the last
five years.
Laura Anne Corsell, Esq. 48 Secretary Ms. Corsell is an attorney in
237 Park Avenue private practice. From 1989
New York, N.Y. 10017 through 1994, Ms. Corsell was
associated with the law firm of
Ballard Spahr Andrews and
Ingersoll, as counsel.
</TABLE>
*Indicates a Trustee who is an "interested person" of the Trust within the
meaning of the Investment Company Act.
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Each of those members of the Board who are not "interested persons" of the Trust
within the meaning of the Investment Company Act ("Independent Trustees")
receive from the Trust a fee of $1,000.00 per meeting of the Board
attended and are reimbursed for expenses incurred in connection with each
such meeting. Those members of the Board who are "interested persons" of the
Trust and the Trust's officers receive no compensation from the Trust for
performing the duties of their respective offices. The table below, which is
required to be included in this Statement of Additional by the Securities and
Exchange Commission, shows the aggregate compensation received from the Trust
by each of the Independent Trustees during the fiscal year ending June 30, 1997
(excluding reimbursed expenses).
<TABLE>
<S> <C> <C> <C> <C>
Pension/ Estimated
Aggregate Retirement Benefits Upon
Name and Compensation Benefits Retirement From Total Compensation
Position From Trust From Trust From Trust From Trust
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Ross H. Goodman $3000.00 $0.0 $0.0 $3000.00
Jarrett Burt Kling 3000.00 0.0 0.0 3000.00
Richard W. Wortham, III 3000.00 0.0 0.0 3000.00
</TABLE>
As permitted under the Trust's Amended and Restated Declaration and
Agreement of Trust and by-laws, the Board has established an executive committee
and has appointed Messrs. Callaghan, Hirtle and Spungen to serve on that
committee. Under the Trust's by-laws, the executive committee is authorized to
act for the full Board in all matters for which the affirmative vote of a
majority of the Board of the Trust's Independent Trustees is not required
under the Investment Company Act or other applicable law. All of the officers
and trustees of the Trust own in the aggregate, less than one percent of the
outstanding shares of The Value Equity, Growth Equity, Small Capitalization
Equity, Limited Duration Municipal Bond and International Equity Portfolios,
respectively. During the fiscal year ended June 30, 1997, Ms. Corsell received
fees for legal services rendered to the Trust (including related
out-of-pocket expenses) of $49,324.00.
Investment Advisory Arrangements. As described in the prospectus, Hirtle,
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Callaghan & Co., Inc. ("Hirtle Callaghan") has entered into a written consulting
agreement with the Trust ("HCCI Consulting Agreement"). The HCCI Consulting
Agreement was approved by the Trust's initial shareholder on July 21, 1995,
following the approval of the Trust's Board (including a majority of the Trust's
Independent Trustees) at a meeting of the Board held on July 20, 1995; that
agreement was last approved by the Trust's Board on May 6, 1997. The HCCI
Consulting Agreement will remain in effect until its second anniversary, unless
sooner terminated and will continue from year to year so long as such
continuation is approved, at a meeting called for the purpose of voting on such
continuance, at least annually (i) by vote of a majority of the Trust's Board or
the vote of the holders of a majority of the outstanding securities of the
Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. The HCCI Consulting Agreement may be terminated at any time, without
penalty, either by the Trust or by Hirtle Callaghan, upon sixty days' written
notice and will automatically terminate in the event of its assignment as
defined in the Investment Company Act. The HCCI Consulting Agreement permits
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the Trust to use the name "Hirtle Callaghan." In the event, however, the HCCI
Consulting Agreement is terminated, Hirtle Callaghan has the right to require
the Trust to discontinue any references to the name "Hirtle Callaghan" and to
change the name of the Trust as soon as is reasonably practicable. The HCCI
Consulting Agreement further provides that HCCI will not be liable to the Trust
for any error, mistake of judgment or of law, or loss suffered by the Trust in
connection with the matters to which the HCCI Consulting Agreement relates
(including any action of any Hirtle Callaghan officer or employee in connection
with the service of any such officer or employee as an officer of the Trust),
whether or not any such action was taken in reliance upon information provided
to the Trust by Hirtle Callaghan, except losses that may be sustained
as a result of willful misfeasance, reckless disregard of its duties, bad faith
or gross negligence on the part of Hirtle Callaghan.
The Trust has also entered into investment advisory contracts ("Portfolio
Management Contracts") on behalf of each of the Portfolios with one or more of
the Investment Managers. Other than the agreement between the Trust and
Hotchkis and Wiley ("Hotchkis") relating to The Value Equity Portfolio, each
of the Portfolio Management Contracts was approved by the Trust's initial
shareholder on July 21, 1995, following that approval of the Trust's Board
(including the Independent Trustees) at a meeting of the Board held on July 20,
1995; each such agreement was last approved by the Trust's Board on
May 6, 1997. Each such contract will remain in effect from year to year so long
as such continuation is approved, at a meeting called to vote on such
continuance, at least annually (i) by vote of a majority of the Trust's Board or
the vote of the holders of a majority of the outstanding securities of the
Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. Each of the Portfolio Management Contracts may be terminated at any
time, without penalty, either by the Trust or by the respective Investment
Managers named in the contract, in each case upon sixty days' written notice,
and each will automatically terminate in the event of its assignment, as that
term is defined in the Investment Company Act.
Each of the Portfolio Management Contracts provides that the named Investment
Manager will, subject to the overall supervision of the Board, provide a
continuous investment program for the assets of the Portfolio to which such
contract relates, or that portion of such assets as may be, from time to time
allocated to such Investment Manager. The Portfolio Managers are responsible,
among other things, for the provision of investment research and management of
all investments and other instruments and the selection of brokers and dealers
through which securities transactions are executed. Each of the Portfolio
Management Contracts provides that the named Investment Manager will not be
liable to the Trust for any error of judgment or mistake of law on the part of
the Investment Manager, or for any loss sustained by the Trust in connection
with the purchase or sale of any instrument on behalf of the named Portfolio,
except losses that may be sustained as a result of willful misfeasance,
reckless disregard of its duties, misfeasance, bad faith or gross negligence on
the part of the named Investment Manager.
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Hotchkis serves as an Investment Manager for The Value Equity Portfolio
pursuant to a contract ("Hotchkis Agreement") that was approved by the Board
(including the Independent Trustees) on July 19, 1996, and by the shareholders
of The Value Equity Portfolio on October 23, 1996. The Hotchkis contract
first became effective on November 12, 1996. The Hotchkis Agreement
will remain in effect until its second anniversary,
and will continue in effect thereafter from year to year so long as such
continuation is approved, at a meeting called for the purpose of voting on such
continuance, at least annually (i) by vote of a majority of the Trust's Board or
the vote of the holders of a majority of the outstanding securities of the
Trust; and (ii) by a majority of the Independent Trustees, by vote cast in
person. The terms and conditions set
forth in the Hotchkis Agreement are identical to those contained in the
Portfolio Management Contracts except for the description of the portfolio
manager, the effective and termination dates, and the modification of certain
notice provisions relating to the obligation of Hotchkis to indemnify the
Trust under certain circumstances. Specifically, Section 5 of the Hotchkis
Agreement provides that the indemnification obligation of the portfolio manager
with respect to information provided to the Trust by Hotchkis L.P. in writing
for use in the Trust's registration statement and certain other documents shall
not apply unless the portfolio manager has had an opportunity to review such
documents for a specified period of time prior to the date on which they are
filed with the Securities and Exchange Commission and unless the portfolio
manager is notified in writing of any claim for indemnification within
specified periods.
From July 29, 1996, until November 12, 1996, Hotchkis'
predecessor limited partnership served as a portfolio manager of The Value
Equity Portfolio pursuant to an agreement ("15a-4 Agreement") approved by the
Board at a meeting held on July 19, 1996. The 15a-4 Agreement became effective
on July 29, 1996, the date on which a similar contract("Prior Agreement") with
a former portfolio manager for the Portfolio was terminated, and was approved
by the shareholders of The Value Equity Portfolio on October 23, 1996, in the
manner contemplated under rule 15a-4 of the Investment Company Act. The 15a-4
Agreement is identical to the Hotchkis Agreement except for the name of the
advisory organization and the terms relating to effective dates. The Hotchkis
Agreement is identical to the Prior Agreement except for the name of the
advisory organization, effective dates and the modification of notice
provisions relating to the Trust's right of indemnification, as noted above.
Prior to November 12, 1996, Hotchkis was an independent California limited
partnership. On November 11, 1996, all of the interests in that partnership
were acquired by Merrill Lynch & Co., ("ML") and the limited partnership
became a division of Merrill Lynch Asset Management LP., a company controlled
ML. In accordance with the Investment Company Act, the consummation of
that acquisition terminated the 15a-4 Agreement; at the same time,
and in accordance with the terms of the 15a-4 Agreement and the Hotchkis
Agreement, the Hotchkis Agreement became effective. ML is a public
company whose shares are traded on the New York Stock Exchange.
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For the fiscal year ended June 30, 1997, Hirtle Callaghan received advisory
fees from each of the Portfolios, calculated at an annual rate of .05%, as
follows: The Value Equity Portfolio, $44,605; The Growth Equity Portfolio,
$ 65,417; The Small Capitalization Portfolio, $41,020; The International Equity,
Portfolio, $52,703; and The Limited Duration Municipal Bond Portfolio, $16,428.
For the fiscal year ended June 30, 1996, Hirtle Callaghan received advisory
fees from each of the Portfolios, calculated at an annual rate of .05%, as
follows: The Value Equity Portfolio, $24,343; The Growth Equity Portfolio,
$34,071; The Small Capitalization Portfolio, $16,940; The International Equity,
Portfolio, $24,436; and The Limited Duration Municipal Bond Portfolio, $7,628.
The foregoing figures reflect voluntary expense reimbursements by Hirtle
Callaghan to the Small Capitalization and Limited Duration Portfolios of
$24,082 and $36,701, respectively for the year ended June 30 1996.
The following table sets forth the investment advisory fee
received from the specified Portfolio by each of its respective Investment
Managers during the fiscal years ended June 30, 1997 and June 30, 1996,
respectively:
<TABLE>
<CAPTION>
Actual Fee Paid for
Investment Manager Portfolio Advisory Fee Rate 1 fiscal year ended
1997 1996
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<S> <C> <C> <C>
Institutional Value Equity .30% of average $150,281 $ 94,103
Capital Corporation net assets
Hotchkis & Wiley Value Equity .30% of average $118,592 -0-
net assets
Jennison Associates Growth Equity .30% of average $210,125 102,397
Capital Corp. net assets
Westfield Capital Growth Equity .30% of average $179,941 102,030
Management Co. net assets
Clover Capital Small Cap .45% of average $185,827 86,448
Management, Inc. net assets
Frontier Capital Small Cap .45% of average $187,263 66,017
Management Co. net assets
Brinson Partners International .40% of average $424,428 95,488
net assets
Morgan Grenfell Limited .20% of average $64,927 30,513
Capital Management Duration net assets
Incorporated
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1 Rate shown applies to that portion of the specified portfolio's assets
allocated to the specified Investment Manager.
2 Effective July 29, 1996, Hotchkis and Wiley replaced Cowen Asset Management.
For the fiscal year ended June 30, 1996, the Growth Equity Portfolio paid
advisory fees to Cowen Asset Management in the amount of $51,954 of that
portfolio's average net assets.
</TABLE>
Other Matters. BISYS Fund Services LP ("BISYS") serves
as the Trust's principal underwriter pursuant to an agreement
approved by the Board on July 19, 1996. BISYS does not receive
any underwriting fees or other compensaton for serving as the
distributor of the Trust's shares. Pursuant to a separate
agreement, BISYS has also, since January 1, 1997, provided administrative
services for the Trust; these services are described in the Trust's
prospectus. For the fiscal year ended June 30, 1997, BISYS received
for such services, fees from each of the Portfolios, as
follows: The Value Equity Portfolio, $89,565;
The Growth Equity Portfolio, $ 130,138; The Small Capitalization
Portfolio, $41,020; The International Equity, Portfolio, $52,703;
and The Limited Duration Municipal Bond Portfolio, $31,952
(all of which was volutarilly waived by BISYS). Pursuant to
secparate agreements, certain affiliates of BISYS also provide transfer
agency and fund accounting services to the Trust.
FURTHER INFORMATION ABOUT THE TRUST'S INVESTMENT POLICIES
The following discussion supplements the discussion of the investment policies
of each of the Portfolios as set forth in the prospectus and the types of
securities and other instruments in which the respective Portfolios may invest.
Repurchase Agreements. As noted in the prospectus, among the instruments that
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each of the Portfolios may use for temporary investment purposes are repurchase
agreements. Under the terms of a typical repurchase agreement, a Portfolio
would acquire an underlying debt security for a relatively short period (usually
not more than one week), subject to an obligation of the seller to repurchase
that security and the obligation of the Portfolio to resell that security at an
agreed-upon price and time. Repurchase agreements could involve certain risks
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in the event of default or insolvency of the other party, including possible
delays or restrictions upon the Portfolio's ability to dispose of the underlying
securities. The Investment Manager for each Portfolio, in accordance with
guidelines adopted by the Board, monitors the creditworthiness of those banks
and non-bank dealers with which the respective Portfolios may enter into
repurchase agreements. The Trust also monitors the market value of the
securities underlying any repurchase agreement to ensure that the repurchase
obligation of the seller is adequately collateralized.
Repurchase agreements may be entered into with primary dealers in U.S.
Government Securities who meet credit guidelines established by the Board (each
a "repo counterparty"). Under each repurchase agreement, the repo counterparty
will be required to maintain, in an account with the Trust's custodian bank,
securities that equal or exceed the repurchase price of the securities subject
to the repurchase agreement. A Portfolio will generally enter into repurchase
agreements with short durations, from overnight to one week, although securities
subject to repurchase agreements generally have longer maturities. A Portfolio
may not enter into a repurchase agreement with more than seven days to maturity
if, as a result, more than 15% of the value of its net assets would be invested
in illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act, a repurchase agreement may be deemed
a loan to the repo counterparty. It is not clear whether, in the context of a
bankruptcy proceeding involving a repo counterparty, a court would consider a
security acquired by a Portfolio subject to a repurchase agreement as being
owned by that Portfolio or as being collateral for such a "loan." If a court
were to characterize the transaction as a loan, and a Portfolio has not
perfected a security interest in the security acquired, that Portfolio could be
required to turn the security acquired over to the bankruptcy trustee and be
treated as an unsecured creditor of the repo counterparty. As an unsecured
creditor, the Portfolio would be at the risk of losing some
or all of the principal and income involved in the transaction.
In the event of any such bankruptcy or
insolvency proceeding involving a repo counterparty with whom a Portfolio has
outstanding repurchase agreements a Portfolio may encounter delays and incur
costs before being able to sell securities acquired subject to such repurchase
agreements. Any such delays may involve loss of interest or a decline in price
of the security so acquired.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the repo counterparty may fail to repurchase the security. However,
a Portfolio will always receive as collateral for any repurchase agreement to
which it is a party securities acceptable to it, the market value of which is
equal to at least 100% of the repurchase price, and the Portfolio will make
payment against such securities only upon physical delivery or evidence of book
entry transfer of such collateral to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement falls below the
repurchase price the Trust will direct the repo counterparty to deliver to the
Trust's custodian additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price.
Variable and Floating Rate Instruments. As noted in the prospectus, among the
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instruments that each of the Portfolios may use for temporary investment
purposes are variable rate demand notes (including floating rate instruments)
from banks and other issuers. A "variable rate instrument" is one whose terms
provide for the adjustment of its interest rate on set dates and which, upon
such adjustment, can reasonably be expected to have a market value that
approximates its par value. A "floating rate instrument" is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a
market value that approximates its par value.
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The Portfolios will be able (at any time or during
specified periods generally not exceeding one year, depending upon the
instrument involved) to demand payment of the principal of a note. The notes are
not typically rated by credit rating agencies. If an issuer of a variable rate
demand note defaulted on its payment obligation, a Portfolio might be unable to
dispose of the note and a loss would be incurred to the extent of the default.
The continuing creditworthiness of issuers of variable rate instruments, if any,
held by a Portfolio will be monitored by its Investment Managers to determine
whether such notes should continue to be held.
When-Issued Securities. As noted in the prospectus, Tax-Exempt Securities may
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be purchased on a "when-issued" basis. The price of securities purchased on a
when-issued basis, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when-
issued securities takes place at a later date. Normally, the settlement date
occurs within one month of the purchase. During the period between purchase and
settlement, no payment is made by the purchaser to the issuer and no interest
accrues to the purchaser. Thus, to the extent that assets are held in cash
pending the settlement of a purchase of securities, the purchaser would earn no
income. At the time a commitment to purchase a security on a when-issued basis
is made, the transaction is recorded and the value of the security will be
reflected in determining net asset value. The market value of the when-issued
securities may be more or less than the purchase price. The Trust does not
believe that net asset value or income will be adversely affected by the
purchase of securities on a when-issued basis.
HEDGING THROUGH THE USE OF OPTIONS.
As indicated in the prospectus, each of the Portfolios may, consistent with its
investment objectives and policies, use options on securities and securities
indexes to reduce the risks associated with the types of securities in which
each is authorized to invest and/or in anticipation of future purchases. A
Portfolio may use options only in a manner consistent with its investment
objective and policies and may not invest more than 10% of its total assets in
option purchases. Options may be used only for the purpose of reducing
investment risk and not for speculative purposes. The following discussion sets
forth certain information relating to the types of options that the Portfolios
may use, together with the risks that may be associated with their use.
About Options on Securities. A call option is a short-term contract pursuant to
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which the purchaser of the option, in return for a premium, has the right to buy
the security underlying the option at a specified price at any time during the
term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option during the option period, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract that gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option period, to buy the
underlying security at the exercise price.
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Options may be based on a security, a securities index or a currency. Options on
securities are generally settled by delivery of the underlying security whereas
options on a securities index or currency are settled in cash. Options may be
traded on an exchange or in the over-the-counter markets.
Option Purchases. Call options on securities may be purchased in order to fix
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the cost of a future purchase. In addition, call options may be used as a means
of participating in an anticipated advance of a security on a more limited risk
basis than would be possible if the security itself were purchased. In the
event of a decline in the price of the underlying security, use of this strategy
would serve to limit the amount of loss, if any, to the amount of the option
premium paid. Conversely, if the market price of the underlying security rises
and the call is exercised or sold at a profit, that profit will be reduced by
the amount initially paid for the call.
Put options may be purchased in order to hedge against a decline in market value
of a security held by the purchasing portfolio. The put effectively guarantees
that the underlying security can be sold at the predetermined exercise price,
even if that price is greater than the market value at the time of exercise. If
the market price of the underlying security increases, the profit realized on
the eventual sale of the security will be reduced by the premium paid for the
put option. Put options may also be purchased on a security that is not held by
the purchasing portfolio in anticipation of a price decline in the underlying
security. In the event the market value of such security declines below the
designated exercise price of the put, the purchasing portfolio would then be
able to acquire the underlying security at the market price and exercise its put
option, thus realizing a profit. In order for this strategy to be successful,
however, the market price of the underlying security must decline so that the
difference between the exercise price and the market price is greater than the
option premium paid.
Option Writing. Call options may be written (sold) by the Portfolios.
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Generally, calls will be written only when, in the opinion of a Portfolio's
Investment Manager, the call premium received, plus anticipated appreciation in
the market price of the underlying security up to the exercise price of the
call, will be greater than the appreciation in the price of the underlying
security.
Put options may also be written. This strategy will generally be used when it
is anticipated that the market value of the underlying security will remain
higher than the exercise price of the put option or when a temporary decrease in
the market value of the underlying security is anticipated and, in the view of a
Portfolio's Investment Manager, it would not be appropriate to acquire the
underlying security. If the market price of the underlying security rises or
stays above the exercise price, it can be expected that the purchaser of the put
will not exercise the option and a profit, in the amount of the premium received
for the put, will be realized by the writer of the put. However, if the market
price of the underlying security declines or stays below the exercise price, the
put option may be exercised and the portfolio that sold the put will be
obligated to purchase the underlying security at a price that may be higher than
its current market value.
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All option writing strategies will be employed only if the option is "covered."
For this purpose, "covered" means that, so long as the Portfolio that has
written (sold) the option is obligated as the writer of a call option, it will
(1) own the security underlying the option; or (2) hold on a share-for-share
basis a call on the same security, the exercise price of which is equal to or
less than the exercise price of the call written. In the case of a put option,
the Portfolio that has written (sold) the put option will (1) maintain cash or
cash equivalents in an amount equal to or greater than the exercise price; or
(2) hold on a share-for share basis, a put on the same security as the put
written provided that the exercise price of the put held is equal to or greater
than the exercise price of the put written.
Options on Securities Indices. Options on securities indices may by used in
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much the same manner as options on securities. Index options may serve as a
hedge against overall fluctuations in the securities markets or market sectors,
rather than anticipated increases or decreases in the value of a particular
security. Thus, the effectiveness of techniques using stock index options will
depend on the extent to which price movements in the securities index selected
correlate with price movements of the portfolio to be hedged. Options on stock
indices are settled exclusively in cash.
Risk Factors Relating to the Use of Options Strategies. The premium paid or
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received with respect to an option position will reflect, among other things,
the current market price of the underlying security, the relationship of the
exercise price to the market price, the historical price volatility of the
underlying security, the option period, supply and demand, and interest rates.
Moreover, the successful use of options as a hedging strategy depends upon the
ability to forecast the direction of market fluctuations in the underlying
securities, or in the case of index options, in the market sector represented by
the index selected.
Under normal circumstances, options traded on one or more of the several
recognized options exchanges may be closed by effecting a "closing purchase
transaction," i.e. by purchasing an identical option with respect to the
underlying security in the case of options written and by selling an identical
option on the underlying security in the case of options purchased. A closing
purchase transaction will effectively cancel an option position, thus permitting
profits to be realized on the position, to prevent an underlying security from
being called from, or put to, the writer of the option or, in the case of a call
option, to permit the sale of the underlying security. A profit or loss may be
realized from a closing purchase transaction, depending on whether the overall
cost of the closing transaction (including the price of the option and actual
transaction costs) is less or more than the premium received from the writing of
the option. It should be noted that, in the event a loss is incurred in a
closing purchase transaction, that loss may be partially or entirely offset by
the premium received from a simultaneous or subsequent sale of a different call
or put option. Also, because increases in the market price of an option will
generally reflect increases in the market price of the underlying security, any
loss resulting from a closing purchase transaction is likely to be offset in
whole or in part by appreciation of the underlying security held.
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Options will normally have expiration dates between three and nine months from
the date written. The exercise price of the options may be below, equal to, or
above the current market values of the underlying securities at the time the
options are written. Options that expire unexercised have no value. Unless an
option purchased by a Portfolio is exercised or a closing purchase transaction
is effected with respect to that position, a loss will be realized in the amount
of the premium paid.
HEDGING THROUGH THE USE OF FUTURES CONTRACTS AND RELATED INSTRUMENTS.
As indicated in the prospectus, each of the Portfolios may, consistent with its
investment objectives and policies, use futures contracts and options on futures
contracts to reduce the risks associated with the types of securities in which
each is authorized to invest and/or in anticipation of future purchases. A
Portfolio may invest in futures-related instruments only for hedging purposes
and not for speculation and only in a manner consistent with its investment
objective and policies. In particular, a Portfolio may not commit more than 5%
of its net assets, in the aggregate, to margin deposits on futures contracts or
premiums for options on futures contracts. The following discussion sets forth
certain information relating to the types of futures contracts that the
Portfolios may use, together with the risks that may be associated with their
use.
About Futures Contracts and Options on Futures Contracts. A futures contract is
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a bilateral agreement pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of the specified type of security or currency
called for in the contract at a specified future time and at a specified price.
In practice, however, contracts relating to financial instruments or currencies
are closed out through the use of closing purchase transactions before the
settlement date and without delivery or the underlying security or currency. In
the case of futures contracts based on a securities index, the contract provides
for "delivery" of an amount of cash equal to the dollar amount specified
multiplied by the difference between the value of the underlying index on the
settlement date and the price at which the contract was originally fixed.
Stock Index Futures Contracts. A Portfolio may sell stock index futures
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contracts in anticipation of a general market or market sector decline that may
adversely affect the market values of securities held. To the extent that
securities held correlate with the index underlying the contract, the sale of
futures contracts on that index could reduce the risk associated with a market
decline. Where a significant market or market sector advance is anticipated,
the purchase of a stock index futures contract may afford a hedge against not
participating in such advance at a time when a Portfolio is not fully invested.
This strategy would serve as a temporary substitute for the purchase of
individual stocks which may later be purchased in an orderly fashion.
Generally, as such purchases are made, positions in stock index futures
contracts representing an equivalent securities would be liquidated.
Futures Contracts on Debt Securities. Futures contracts on debt securities,
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often referred to as "interest rate futures," obligate the seller to deliver a
specific type of debt security called for in the contract, at a specified future
time. A public market now exists for futures contracts covering a number of
debt securities, including long-term U.S. Treasury bonds, ten-year U.S. Treasury
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notes, and three-month U.S. Treasury bills, and additional futures contracts
based on other debt securities or indices of debt securities may be developed
in the future. Such contracts may be used to hedge against changes in the
general level of interest rates. For example, a Portfolio may purchase such
contracts when it wishes to defer a purchase of a longer-term bond because
short-term yields are higher than long-term yields. Income would thus be earned
on a short-term security and minimize the impact of all or part of an increase
in the market price of the long-term debt security to be purchased in the
future. A rise in the price of the long-term debt security prior to its
purchase either would be offset by an increase in the value of the contract
purchased by the Portfolio or avoided by taking delivery of the debt securities
underlying the futures contract. Conversely, such a contract might be sold in
order to continue to receive the income from a long-term debt security, while
at the same time endeavoring to avoid part or all of any decline in market value
of that security that would occur with an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security would be
substantially offset by an increase in the value of the futures contract sold.
Options on Futures Contracts. An option on a futures contract gives the
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purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified price at any time during the period of
the option. The risk of loss associated with the purchase of an option on a
futures contract is limited to the premium paid for the option, plus transaction
cost. The seller of an option on a futures contract is obligated to a broker
for the payment of initial and variation margin in amounts that depend on the
nature of the underlying futures contract, the current market value of the
option, and other futures positions held by the Portfolio. Upon exercise of the
option, the option seller must deliver the underlying futures position to the
holder of the option, together with the accumulated balance in the seller's
futures margin account that represents the amount by which the market price of
the underlying futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option involved. If an option
is exercised on the last trading day prior to the expiration date of the option,
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the value at the close of trading on the
expiration date.
Risk Considerations Relating to Futures Contracts and Related Instruments.
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Participants in the futures markets are subject to certain risks. Positions in
futures contracts may be closed out only on the exchange on which they were
entered into (or through a linked exchange): no secondary market exists for
such contracts. In addition, there can be no assurance that a liquid market
will exist for the contracts at any particular time. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, and in the event of adverse price
movements, a Portfolio would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of that
portion of the securities being hedged, if any, may partially or completely
offset losses on the futures contract.
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As noted above, there can be no assurance that price movements in the futures
markets will correlate with the prices of the underlying securities positions.
In particular, there may be an imperfect correlation between movements in the
prices of futures contracts and the market value of the underlying securities
positions being hedged. In addition, the market prices of futures contracts may
be affected by factors other than interest rate changes and, as a result, even a
correct forecast of interest rate trends might not result in a successful
hedging strategy. If participants in the futures market elect to close out
their contracts through offsetting transactions rather than by meeting margin
deposit requirements, distortions in the normal relationship between debt
securities and the futures markets could result. Price distortions could also
result if investors in the futures markets opt to make or take delivery of the
underlying securities rather than engage in closing transactions because such
trend might result in a reduction in the liquidity of the futures market. In
addition, an increase in the participation of speculators in the futures market
could cause temporary price distortions.
The risks associated with options on futures contracts are similar to those
applicable to all options and are summarized above under the heading "Hedging
Through the Use of Options: Risk Factors Relating to the Use of Options
Strategies." In addition, as is the case with futures contracts, there can be
no assurance that (1) there will be a correlation between price movements in the
options and those relating to the underlying securities; (2) a liquid market for
options held will exist at the time when a Portfolio may wish to effect a
closing transaction; or (3) predictions as to anticipated interest rate or other
market trends on behalf of a Portfolio will be correct.
Margin Requirements and Limitations Applicable to Futures Related Transactions.
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When a purchase or sale of a futures contract is made by a Portfolio, that
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"). 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 which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day
the Portfolio pays or receives cash, called "variation margin" equal to the
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in 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,
the Portfolio will value its open futures positions at market.
A Portfolio will not enter into a futures contract or an option on a futures
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.
Segregation Requirements.
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Futures Contracts. When purchasing a futures contract, a Portfolio will
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maintain, either with its custodian bank or, if permitted, a broker, and will
mark-to-market on a daily basis, cash, U.S. Government securities, or other
highly 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, a 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, a Portfolio will similarly maintain 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, a Portfolio may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index futures
contract, a portfolio with a volatility substantially similar to that of the
index on which the futures contract is based), or by holding a call option
permitting a Portfolio to purchase the same futures contract at a price no
higher than the price of the contract written by that Portfolio (or at a higher
price if the difference is maintained in liquid assets with the Trust's
custodian).
Options on Futures Contracts. When selling a call option on a futures contract,
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a Portfolio will maintain, either with its custodian bank or, if permitted, a
broker, and will mark-to-market on a daily basis, cash, U. S. Government
securities, or other highly 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.
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When selling a put option on a futures contract, the Portfolio will similarly
maintain cash, U.S. Government securities, or other highly 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.
HEDGING THROUGH THE USE OF CURRENCY RELATED INSTRUMENTS.
As indicated in the prospectus, The Growth Portfolio may use forward foreign
currency exchange contracts in connection with permitted purchases and sales of
securities of non-U.S. issuers. In addition, The International Equity Portfolio
may, consistent with its investment objectives and policies, use such contracts
as well as certain other currency related instruments to reduce the risks
associated with the types of securities in which it is authorized to invest and
to hedge against fluctuations in the relative value of the currencies in which
securities held by The International Equity Portfolio are denominated. The
following discussion sets forth certain information relating to forward currency
contracts and other currency related instruments, together with the risks that
may be associated with their use.
About Currency Transactions and Hedging. The International Equity Portfolio is
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authorized to purchase and sell options, futures contracts and options thereon
relating to foreign currencies and securities denominated in foreign currencies.
Such instruments may be traded on foreign exchanges, including foreign over-the-
counter markets. Transactions in such instruments 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) 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 a
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States; and (iv) lesser trading volume.
Foreign currency exchange transactions may be entered into for the purpose of
hedging against foreign currency exchange risk arising from the Portfolio's
investment or anticipated investment in securities denominated in foreign
currencies. The International Equity Portfolio may also purchase and sell
options relating to foreign currencies to increase exposure to a foreign
currency or to shift foreign currency exposure from one country to another.
Foreign Currency Options and Related Risks. The International Equity Portfolio
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may take positions in options on foreign currencies to hedge against the risk of
foreign exchange rate fluctuations on foreign securities the Portfolio holds in
its portfolio or intends to purchase. For example, if the Portfolio were to
enter into a contract to purchase securities denominated in a foreign currency,
it could effectively fix the maximum U.S. dollar cost of the securities by
purchasing call options on that foreign currency. Similarly, if the Portfolio
held securities denominated in a foreign currency and anticipated a decline in
the value of that currency against the U.S. dollar, it could hedge against such
a decline by purchasing a put option on the currency involved. The markets in
foreign currency options are relatively new, and the Portfolio's ability to
establish and close out positions in such options is subject to the maintenance
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of a liquid secondary market. There can be no assurance that a liquid
secondary market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The quantities of currencies underlying option contracts represent odd
lots in a market dominated by transactions between banks, and as a result
extra transaction costs may be incurred upon exercise of an option.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised
on a timely basis. Quotation information is generally representative of
very large transactions in the interbank market and may not reflect smaller
transactions where rates may be less favorable. Option markets may be
closed while round-the-clock interbank currency markets are open,
and this can create price and rate discrepancies.
Forward Foreign Currency Exchange Contracts. The Growth Equity Portfolio may use
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forward contracts to protect against uncertainty in the level of future exchange
rates in connection with specific transactions. For example, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when the Portfolio anticipates the receipt in a foreign
currency of dividend or interest payments on a security that it holds, the
Portfolio may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of the payment, by entering into a forward contract for
the purchase or sale of the foreign currency involved in the underlying
transaction in exchange for a fixed amount of U.S. dollars or foreign currency.
This may serve as a hedge against a possible loss resulting from an adverse
change in the relationship between the currency exchange rates during the period
between the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or received.
The International Equity Portfolio may also use forward contracts in connection
with specific transactions. In addition, it may use such contracts to lock in
the U.S. dollar value of those positions, to increase the Portfolio's exposure
to foreign currencies that the Investment Manager believes may rise in value
relative to the U.S. dollar or to shift the Portfolio's exposure to foreign
currency fluctuations from one country to another. For example, when the
Investment Manager believes that the currency of a particular foreign country
may suffer a substantial decline relative to the U.S. dollar or another
currency, it may enter into a forward contract to sell the amount of the former
foreign currency approximating the value of some or all of the Portfolio's
portfolio securities denominated in such foreign currency. This investment
practice generally is referred to as "cross-hedging."
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because 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. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (i.e., cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be accurately predicted, causing the
Portfolio to sustain losses on these contracts and transaction costs. A
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Portfolio may enter into forward contracts or maintain a net exposure to such
contracts only if: (1) the consummation of the contracts would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities and other assets denominated in that currency; or (2) the
Portfolio maintains cash, U.S. Government securities or other liquid securities
in a segregated account in an amount which, together with the value of all the
Portfolio's securities denominated in such currency, equals or exceeds the value
of such contracts.
At or before the maturity date of a forward contract that requires the Portfolio
to sell a currency, the Portfolio may either sell a portfolio security and use
the sale proceeds to make delivery of the currency or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, the
Portfolio may close out a forward contract requiring it to purchase a specified
currency by entering into another contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. As a result of
such an offsetting transaction, a Portfolio would realize a gain or a loss to
the extent of any change in the exchange rate between the currencies involved
between the execution dates of the first and second contracts.
The cost to a Portfolio of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
prevailing market conditions. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Portfolio owns or intends to acquire, but it does fix
a rate of exchange in advance. In addition, although forward contracts limit
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 the
currencies increase.
Although The International Equity Portfolio values its assets daily in terms of
U.S. dollars, it does not intend to convert its holdings of foreign currencies
into U.S. dollars on a daily basis. The Portfolio may convert foreign currency
from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference between the prices
at which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to the Portfolio at one rate, while offering
a lesser rate of exchange should the Portfolio desire to resell that currency
to the dealer.
INVESTMENT RESTRICTIONS
In addition to the investment objectives and policies of the Portfolios, each
Portfolio is subject to certain investment restrictions both in accordance with
various provisions of the Investment Company Act and guidelines adopted by the
Trust's Board. These investment restrictions are summarized below.
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The following investment restrictions (1 though 9) are fundamental and cannot be
changed with respect to any Portfolio without the affirmative vote of a majority
of the Portfolio's outstanding voting securities as defined in the Investment
Company Act.
A Portfolio may not:
1. Purchase the securities of any issuer, if as a result of such purchase,
more than 5% of the total assets of the Portfolio would be invested in the
securities of that issuer, or purchase any security if, as a result of such
purchase, a Portfolio would hold more than 10% of the outstanding voting
securities of an issuer, provided that up to 25% of the value of the
Trust's assets may be invested without regard to this limitation, and
provided further that this restriction shall not apply to investments in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, repurchase agreements secured by such obligations, or
securities issued by other investment companies.
2. Borrow money, except that a Portfolio (i) may borrow amounts, taken in the
aggregate, equal to up to 5% of its total assets, from banks for temporary
purposes (but not for leveraging or investment) and (ii) may engage in
reverse repurchase agreements for any purpose, provided that (i) and (ii)
in combination do not exceed 33 1/3% of the value of the Portfolio's total
assets (including the amount borrowed) less liabilities (other than
borrowings).
3. Mortgage, pledge or hypothecate any of its assets except in connection with
any permitted borrowing, provided that this restriction does not prohibit
escrow, collateral or margin arrangements in connection with a Portfolio's
permitted use of options, futures contracts and similar derivative
financial instruments described in the Trust's prospectus.
4. Issue senior securities, as defined in the Investment Company Act, provided
that this restriction shall not be deemed to prohibit a Portfolio from
making any permitted borrowing, mortgage or pledge, and provided further
that the permitted use of options, futures contracts and similar derivative
financial instruments described in the Trust's prospectus shall not
constitute issuance of a senior security.
5. Underwrite securities issued by others, provided that this restriction
shall not be violated in the event that the Portfolio may be considered an
underwriter within the meaning of the Securities Act of 1933 in the
disposition of portfolio of securities.
6. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, provided that this shall not prevent a
Portfolio from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business.
7. Purchase or sell commodities or commodity contracts, unless acquired as a
result of ownership of securities or other instruments, provided that a
Portfolio may purchase and sell futures contracts relating to financial
instruments and currencies and related options in the manner described in
the Trust's prospectus.
8. Make loans to others, provided that this restriction shall not be construed
to limit (a) purchases of debt securities or repurchase agreements in
accordance with a Portfolio's investment objectives and policies; and (b)
loans of portfolio securities in the manner described in the Trust's
prospectus.
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9. Invest more than 25% of the market value of its assets in the securities of
companies engaged in any one industry provided that this restriction does
not apply to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, repurchase agreements secured by such
obligations or securities issued by other investment companies.
The following investment restrictions (10 through 15) reflect policies that have
been adopted by the Trust, but they are not fundamental and may be changed by
the Trust's Board, without shareholder vote.
A Portfolio may not:
10. Invest in any issuer for purposes of exercising control or management.
11. Make short sales of securities or maintain a short position, or purchase
securities on margin, provided that this restriction shall not preclude
the Trust from obtaining such short-term credits as may be necessary for
the clearance of purchases and sales of its portfolio securities, and
provided further that this restriction will not be applied to limit the
use by a Portfolio of options, futures contracts and similar derivative
financial instruments in the manner described in the Trust's prospectus.
12. Invest in securities of other investment companies except as permitted
under the Investment Company Act.
13. Buy or sell interests in oil, gas or mineral exploration or development
programs or related leases, provided that this restriction shall not
preclude investments in marketable securities of issuers engaged in such
activities.
14. Purchase any security if, as a result, the Portfolio would have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
15. Invest more than 5% of the market value of a Portfolio's total assets in
warrants or invest more than 2% of such value in warrants that are not
listed on the New York or American Stock Exchange.
An investment restriction applicable to a particular Portfolio shall not be
deemed violated as a result of a change in the market value of an investment,
the net or total assets of that Portfolio, or any other later change provided
that the restriction was satisfied at the time the relevant action was taken.
In order to permit the sale of its shares in certain states, the Trust may make
commitments more restrictive than those described above. Should the Trust
determine that any such commitment may no longer be appropriate, the Board will
consider whether to revoke the commitment and terminate sales of its shares in
the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion to suspend the continued
offering of the Trust's shares and to reject purchase orders in whole or in part
when in the judgment of the Board such action is in the best interest of the
Trust.
Payments to shareholders for shares of the Trust redeemed directly from the
Trust will be made as promptly as possible but no later than seven days after
receipt by the Trust's transfer agent of the written request in proper form,
with the appropriate documentation as stated in the prospectus, except that the
Trust may suspend the right of redemption or postpone the date of payment during
any period when (a) trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission or such Exchange is closed
for other than weekends and holidays; (b) an emergency exists as determined by
the Securities and Exchange Commission making disposal of portfolio securities
or valuation of net assets of the Trust not reasonably practicable; or for such
other period as the Securities and Exchange Commission may permit for the
protection of the Trust's shareholders.
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Each of the Portfolios reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of the
Trust's shares by making payment in whole or in part in readily marketable
securities chosen by the Trust and valued in the same way as they would
be valued for purposes of computing each Portfolio's net asset value. If
such payment were made, an investor may incur brokerage costs in converting such
securities to cash. The value of shares on redemption or repurchase may be more
or less than the investor's cost, depending upon the market value of the Trust's
portfolio securities at the time of redemption or repurchase.
PORTFOLIO TRANSACTIONS AND VALUATION
Subject to the general supervision of the Board, the Investment Managers of the
respective Portfolios are responsible for placing orders for securities
transactions for each of the Portfolios. Securities transactions involving
stocks will normally be conducted through brokerage firms entitled to receive
commissions for effecting such transactions. In placing portfolio transactions,
an Investment Manager will use its best efforts to choose a broker or dealer
capable of providing the services necessary to obtain the most favorable price
and execution available. The full range and quality of services available will
be considered in making these determinations, such as the size of the order, the
difficulty of execution, the operational facilities of the firm involved, the
firm's risk in positioning a block of securities, and other factors. In placing
brokerage transactions, the respective Investment Managers may, however,
consistent with the interests of the Portfolios they serve, select brokerage
firms on the basis of the research, statistical and pricing services they
provide to the Investment Manager. In such cases, a Portfolio may pay a
commission that is higher than the commission that another qualified broker
might have charged for the same transaction, providing the Investment Manager
involved determines in good faith that such commission is reasonable in terms
either of that transaction or the overall responsibility of the Investment
Manager to the Portfolio and such manager's other investment advisory clients.
Transactions involving debt securities and similar instruments are expected to
occur primarily with issuers, underwriters or major dealers acting as
principals. Such transactions are normally effected on a net basis and do not
involve payment of brokerage commissions. The price of the security, however,
usually includes a profit to the dealer. Securities purchased in underwritten
offerings include a fixed amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. When securities are
purchased directly from or sold directly to an issuer, no commissions or
discounts are paid.
<PAGE>
<PAGE>
The table below reflects the aggregate dollar amount of brokerage commissions
paid by each of the portfolios of the Trust paid the during the fiscal years
indicated.
<TABLE>
<CAPTION>
Portfolio Aggregate Brokerage Commissions
for the Fiscal Years ended
1997 1996
- ----------------- ----------- -------------
<S> <C> <C>
Value Equity $179,053 $137,963
Growth Equity 258,337 238,948
Small Cap 227,730 147,928
International Equity 250,705 144,359
Limited Duration -0- -0-
</TABLE>
The Trust has adopted procedures pursuant to which each portfolio is permitted
to allocate brokerage transactions to affiliates of the various Investment
Managers. Under such procedures, commissions paid to any such affiliate must
be fair and reasonable compared to the commission, fees or other remuneration
paid to other brokers in connection with comparable transactions. Several of
the Trust's Investment Managers are affiliated with brokerage firms to which
brokerage transactions may, from time to time, be allocated.
The table below reflects the aggregate dollar amount of commissions
paid to each such firm, as well as similar information about transactions
allocated to Furman Selz, LLC, (which servced as the Trust's principal
underwriter prior to January 1, 1997) by the Portfolios during the period.
Information shown is expressed both as a percentage
of the total amount of commission dollars paid by each
portfolio and as a percentage of the total value of all brokerage
transactions effected on behalf of each portfolio. "NA" indicates that
during the relevant period, the indicated broker was not considered
an affiliate of the specified portfolio.
<TABLE>
<CAPTION>
Affiliated Portfolio
Broker1 --------------------------------------------------------
For Value For Growth For Small For Int'l For Limited
Equity Equity Cap Equity Equity Duration
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- --------- ------------ --------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cowen & Co.2
% of commissions -0- 34% -0- .02% -0- -0- -0- -0- -0- -0-
% of transactions -0- .94% -0- .05% -0- -0- -0- -0- -0- -0-
Prudential
Securities3
% of commissions NA NA 1.36 1.45% NA NA NA NA NA NA
% of transactions NA NA 1.38% .70% NA NA NA NA NA NA
Merrill Lynch & Co.4
% of commissions .80% NA 2.21% NA 1.51%% NA 2.08% NA -0- NA
% of transactions .61% NA 5.47% NA 1.56% NA 2.74% NA -0- NA
Furman Selz LLC5
% of commissions -0- -0- -0- 4.20% -0- -0- -0- -0- -0- -0-
% of transactions -0- -0- -0- 1.26% -0- -0- -0- -0- -0- -0-
</TABLE>
- -------
1. Other brokers deemed to be affiliated with certain Portfolios are:
with respect to The International Portfolio, companies affiliated with
Swiss Bank, of which Brinson Partners is a wholly-owned subsidiary and
with respect to The Limited Duration Municipal Bond Portofolio, companies
affiliated with Deutchebank, the parent company of Morgan Grenfell Capital
Management Incorporated. No brokerage transactions were affected through
such companies during the period reflected in the above table by the
relevant Portfolios.
2. Cowen Asset Management, which served as an Investment Manager of The Value
Equity Portfolio prior to August 1, 1996, is a division of Cowen & Co.
3. Both Prudential Securities and Jennison Associates Capital Management Corp.,
which serves as an Investment Manager of The Value Equity Portfolio,
are wholly-owned subsidiaries of Prudential Insurance Company of America.
4. Figures shown include all brokers affiliated with Merrill Lynch & Co.
Merrill Lynch Asset Management, LLP, ("MLAM") of which Hotchkis and Wiley
is a division. MLAM is a wholly, indirect subsidiary of Merrill Lynch & Co.
5. Furman Selz LLC served as the Trust's principal underwriter
prior to January 1, 1997.
In no instance will portfolio securities be purchased from or sold to Investment
Managers, Hirtle Callaghan or any affiliated person of the foregoing entities
except to the extent permitted by applicable law or an order of the Securities
and Exchange Commission. Investment decisions for the several Portfolios are
made independently from those of any other client accounts (which may include
mutual funds) managed or advised by an Investment Manager. Nevertheless, it is
possible that at times identical securities will be acceptable for both a
Portfolio of the Trust and one or more of such client accounts. In such cases,
simultaneous transactions are inevitable. Purchases and sales are then averaged
as to price and allocated as to amount according to a formula deemed equitable
to each such account. While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as a Portfolio
is concerned, in other cases it is believed that the ability of a Portfolio to
participate in volume transactions may produce better executions for such
Portfolio.
<PAGE>
<PAGE>
Portfolio Turnover. Changes may be made in the holdings of any of the
- ------------------
Portfolios consistent with their respective investment objectives and policies
whenever, in the judgment of the relevant Investment Manager, such changes are
believed to be in the best interests of the Portfolio involved. It is
anticipated that the annual portfolio turnover rate for a Portfolio will not
exceed 100% under normal circumstances. The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
by the average monthly value of a Portfolio's securities. For purposes of this
calculation, portfolio securities exclude all securities having a maturity when
purchased of one year or less. The portfolio turnover rate for each of the
Portfolios that has more than one Investment Manager will be an aggregate of the
rates for each individually managed portion of that Portfolio. Rates for each
portion, however, may vary significantly. The portfolio turnover rate for each
of the Trust's Portfolios for the fiscal year ended June 30, 1997 were:
for the Value Equity Portfolio, 97.30%; for the Growth Equity Portfolio, 80.47%;
for the Small Capitalization Equity Portfolio, 54.16%; for the International
Portfolio, 29.85% and for the Limited Duration Municipal Bond Portfolio, 44.57%.
The portfolio turnover rates for the portfolios for the period beginning
with the commencement of the respective portfolio's operations and ending
on June 30, 1996, were as follows: for the Value Equity Portfolio, 92.00%;
for the Growth Equity Portfolio, 80.00%; for the Small Capitalization Equity
Portfolio, 38.00%; for the International Portfolio, 15.00%; and for the
Limited Duration Municipal Bond Portfolio, 116.00%.
Valuation. The net asset value per share of the Portfolios is determined once
- -----------
on each Business Day as of the close of the New York Stock Exchange, which is
normally 4 P.M. New York City time, on each day the New York Stock Exchange is
open for trading. The Trust does not
expect to determine the net asset value of its shares on any day when the
Exchange is not open for trading even if there is sufficient trading in its
portfolio securities on such days to materially affect the net asset value per
share.
In valuing the Trust's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board shall determine in
good faith to reflect the security's fair value. All other assets of each
Portfolio are valued in such manner as the Board in good faith deems
appropriate to reflect their fair value. The net asset value per share of
each of the Trust's Portfolios is calculated as
follows: All liabilities incurred or accrued are deducted from the valuation of
total assets which includes accrued but undistributed income; the resulting net
asset value is divided by the number of shares outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. As noted in the prospectus, each Portfolio will
- ---------------------------
distribute substantially all of its net investment income and net realized
capital gains, if any. It is anticipated that The Value Portfolio, The Growth
Portfolio and The Small Capitalization Equity Portfolio will declare and
distribute dividends from net investment income on a quarterly basis. The
Limited Duration Municipal Bond Portfolio will declare dividends daily, with
payments on a monthly basis. The International Equity Portfolio will declare
dividends semi-annually. The Trust expects to distribute any undistributed net
investment income and capital gains for the 12-month period ended each October
31, on or about December 31 of each year.
<PAGE>
<PAGE>
Tax Information. Each of the Trust's Portfolios is treated as a separate entity
- ---------------
for federal income tax purposes. Each Portfolio intends to qualify and elect to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") for the fiscal year ending June
30, 1996 and intends to continue to so qualify. Accordingly, it is the policy
of each Portfolio to distribute to its shareholders by December 31 of each
calendar year (i) at least 98% of its ordinary income for such year; (ii) at
least 98% of the excess of its realized capital gains over its realized capital
losses for the 12-month period ending on October 31 during such year; and (iii)
any amounts from the prior calendar year that were not distributed.
The following discussion and related discussion in the prospectus do not purport
to be a complete description of all tax implications of an investment in the
Trust. In addition, such information relates solely to the application of that
law to U.S. citizens or residents and U.S. domestic corporations, partnerships,
trusts and estates. A shareholder should consult with his or her own tax
adviser for more information about Federal, state, local or foreign taxes. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Trust, including the possibility that
such a shareholder may be subject to a U.S. withholding tax on amounts
constituting ordinary income.
Distributions of net investment income and short-term capital gains are taxable
to shareholders as ordinary income. Distributions paid by a Portfolio out of
long-term capital gain are taxable to those investors who are subject to income
tax as long term capital gain. In the case of corporate shareholders,
a portion of the distributions may qualify for the dividends-received deduction
to the extent the Trust designates the amount distributed by any Portfolio as a
qualifying dividend. The aggregate amount so designated cannot, however, exceed
the aggregate amount of qualifying dividends received by that Portfolio for its
taxable year. It is expected that dividends from domestic corporations will be
part of the gross income for one or more of the Portfolios and, accordingly,
that part of the distributions by such Portfolios may be eligible for the
dividends-received deduction for corporate shareholders. However, the portion of
a particular Portfolio's gross income attributable to qualifying dividends is
largely dependent on that Portfolio's investment activities for a particular
year and therefore cannot be predicted with any certainty. The deduction may be
reduced or eliminated if shares of such Portfolio held by a corporate investor
are treated as debt-financed or are held for less than 46 days.
Distributions of net investment income and short-term capital gains are taxable
to shareholders as long-term capital gains, regardless of the length of time
they have held their shares. Capital gains distributions are not eligible for
the dividends-received deduction referred to in the previous paragraph.
Distributions of any net investment income and net realized capital gains will
be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in
October, November or December to shareholders of record on a date in such a
month and paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
<PAGE>
<PAGE>
A redemption of Trust shares may result in recognition of a taxable gain or
loss. Any loss realized upon a redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains
during such six-month period. Any loss realized upon a redemption may be
disallowed under certain wash sale rules to the extent shares of the same Trust
are purchased (through reinvestment of distributions or otherwise) within 30
days before or after the redemption or exchange.
The Trust is required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Trust shares, except in the case of exempt
shareholders, which includes most corporations. Pursuant to the backup
withholding provisions of the Code, distributions of any taxable income and
capital gains and proceeds from the redemption of Trust shares may be subject to
withholding of federal income tax at the rate of 31 percent in the case of non-
exempt shareholders who fail to furnish the Trust with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Trust with their
taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Trust reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
Tax Matters Relating to the Use of Certain Hedging Instruments and Foreign
- --------------------------------------------------------------------------
Investments. Certain of the Portfolios may write, purchase or sell certain
- -----------
options, futures and foreign currency contracts. Such transactions are subject
to special tax rules that may affect the amount, timing and character of
distributions to shareholders. Unless a Portfolio is eligible to make, and
makes, a special election, any such contract that is a "Section 1256 contract"
will be "marked-to-market" for Federal income tax purposes at the end of each
taxable year, i.e., each contract will be treated for tax purposes as though it
<PAGE>
<PAGE>
had been sold for its fair market value on the last day of the taxable year. In
general, unless the special election referred to in the previous sentence is
made, gain or loss from transactions in Section 1256 contracts will be 60% long
term and 40% short term capital gain or loss. Additionally, Section 1092 of the
Code, which applies to certain "straddles," may affect the tax treatment of
income derived by a Portfolio from transactions in option, futures and foreign
currency contracts. In particular, under this provision, a Portfolio may, for
tax purposes, be required to postpone recognition of losses incurred in certain
closing transactions.
Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing, and character of
income, gain or loss recognized by the Trust. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency-denominated
payables and receivables, and foreign currency options and futures contracts
(other than options, futures, and foreign currency contracts that are governed
by the mark-to-market and 60%-40% rules of Section 1256 of the Code and for
which no election is made) is treated as ordinary income or loss. Under the
Code, dividends or gains derived by a Portfolio from any investment in a
"passive foreign investment company" ("PFIC")-- a foreign corporation 75 percent
or more of the gross income of which consists of interest, dividends, royalties,
rents, annuities or other "passive income" or 50 percent or more of the assets
of which produce "passive income" -- may subject a Portfolio to U.S. federal
income tax even with respect to income distributed by the Portfolio to its
shareholders. In addition, any such tax will not itself give rise to a
deduction or credit to the Portfolio or to any shareholder. In order to avoid
the tax consequences described above, those Portfolios authorized to invest
in foreign securities will attempt to avoid investments in PFICs.
PERFORMANCE INFORMATION
From time to time, a Portfolio may state its total return in sales literature
and investor presentations. Total return may be stated for any relevant period
specified. Any statements of total return will be accompanied by information on
that Portfolio's average annual compounded rate of return over the most recent
four calendar quarters and the period from the inception of that Portfolio's
operations. The Trust may also advertise aggregate and average total return
information over different periods of time for the various Portfolios.
The average annual compounded rate of return for a Portfolio is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the formula P(1+T)/n/ =
ERV. For purposes of this formula, the variables represent the following
values:
P = a hypothetical initial purchase of $1,000
T = average annual total return
n = number of years
ERV = redeemable value of hypothetical $1,000 initial purchase
at the end of the period.
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
From time to time, evaluations of a Trust's performance by independent sources
may also be used in advertisements and in information furnished to present or
prospective investors in the Trusts. Investors should note that the investment
results of each of the Trust's Portfolios will fluctuate over time, and any
presentation of a Portfolio's total return for any period should not be
considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
<PAGE>
<PAGE>
The table below shows the name and address of record of each person known
to the Trust to hold, as of record or beneficially, 5% or more of shares
of the Trust as August 29, 1997. Hirtle Callaghan may be deemed to have,
or share, investment and/or voting power with respect to more than 50% of
the shares of the Trust's portfolios, with respect to which shares Hirtle
Callaghan disclaims beneficial ownership.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small
Name and Address of Value Growth Capitalization International Limited Duration
Record Holder Equity Equity Equity Equity Municipal Bond
- -----------------------------------------------------------------------------------------------------------------
Bankers Trust Company 68.19% 78.14% 83.25% 65.50% 94.12%
1 Bankers Trust Plaza
New York, N.Y. 10006
PNC Bank, N.A. 12.41% 7.86% 6.69% 18.04% (1) --
P.O. Box 7780-1888
Philadelphia, PA 19182
Northern Trust Company 11.11% (2) 8.16% (3) 6.94% (4) 5.89% (5) --
P.O. Box 92956
Chicago, IL 60675
- ----------------------------
(1) Shares include 12.24% held FBO 78 PGH Pension
(2) Shares include 10.45% held FBO SFTRS 26-31827
(3) Shares include 7.48% held FBO SFTRS HC
(4) Shares include 6.29% held FBO SFTRS HC
(5) Shares include 5.34% held FBO SFTRS HC
</TABLE>
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.
Coopers and Lybrand, L.L.P., serves as the Trust's independent accountants.
The Trust's financial statements as of June 30, 1997, have been audited by
Coopers and Lybrand, L.L.P, whose address is 2400 Eleven Penn Center,
Philadelphia, PA 19103. Such statement and accompanying report are set
forth in the Trust's Annual Report to Shareholders, which accompanies this
Statement of Additional Information and is incorporated herein by reference.
<PAGE>
<PAGE>
Ratings Appendix
Ratings for Corporate Debt Securities
<TABLE>
<CAPTION>
Moody's Investors Service, Inc. Standard & Poor's Corporation
<S> <C>
Aaa AAA
Judged to be of the best quality; smallest This is the highest rating assigned by S&P to a
degree of investment risk debt obligation and indicates an extremely strong
capacity to pay principal and interest.
Aa AA
Judged to be of high quality by all Also qualify as high-quality debt obligations.
standards; together with Aaa group, Capacity to pay principal and interest is very
comprise what are generally known as strong
"high grade bonds"
A A
Possess many favorable investment Strong capacity to pay principal and interest,
attributes and are to be considered as although securities in this category are somewhat
upper medium grade obligations more susceptible to the adverse effects of changes
in circumstances and economic conditions.
Baa BBB
Medium grade obligations, i.e. Bonds rated BBB are regarded as having an adequate
they are neither highly protected nor capacity to pay principal and interest. Although
poorly secured. Interest payments they normally exhibit adequate protection
and principal security appear parameters, adverse economic conditions or
adequate for present but certain changing circumstances are more likely to lead to
protective elements may be lacking or a weakened capacity to pay principal and interest
unreliable over time. Lacking in for bonds in this category than for bonds in the A
outstanding investment characteristics and category.
have speculative characteristics as well
Ba BB
Judged to have speculative elements: their Bonds rated BB are regarded, on balance, as
future cannot be considered as well predominantly speculative with respect to the
assured. Often the protection of issuer's capacity to pay interest and repay
interest and principal payments principal in accordance with the terms of the
may every moderate and thereby not well obligation. While such bonds will likely have some
safeguarded during both good and bad quality and protective characteristics, these are
times over the future. Uncertainty outweighed by large uncertainties or major risk
of position characterize bonds exposures to adverse conditions.
in this class
</TABLE>
<PAGE>
<PAGE>
RATINGS FOR MUNICIPAL SECURITIES
The following summarizes the two highest ratings used by Standard & Poor's
Corporation for short term notes:
SP-1 -- Loans bearing this designation evidence a very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics will be given a (+) designation.
SP-2 -- Loans bearing this designation evidence a satisfactory capacity to
pay principal and interest.
The following summarizes the two highest ratings used by Moody's Investors
Service, Inc. for short term notes:
MIG-1/VIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the
market for refinancing, or both.
MIG-1/VIG-2 -- Obligations bearing these designations are of the high
quality, with margins of protection ample although not so large as in the
preceding group.
The following summarizes the two highest ratings used by Standard & Poor's
Corporation for commercial paper:
Commercial Paper rated A-1 by Standard & Poor's Corporation indicated that
the degree of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming safety
characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is strong, but the relative degree of safety is
not as high as for issues designated A-1.
The following summarizes the two highest ratings used by Moody's Investors
Service, Inc. for commercial paper:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many
of the characteristics of issuers rated Prime-1 but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is
maintained.
