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NOTES TO FINANCIAL STATEMENTS
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The Advisors Inner Circle Fund
(the Trust) is organized as a Massachusetts business trust under an Amended and Restated Agreement and Declaration of Trust dated
February 18, 1997. The Trust is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company with 45 portfolios. The financial statements herein are those of the McKee International Equity
Portfolio (the Portfolio). The investment objective of the Portfolio is long-term total return. The Portfolio is non-diversified and invests primarily (at least 80% of its net assets) in equity securities of companies located in at least
three countries other than the U.S. The financial statements of the remaining portfolios of the Trust are presented separately. The assets of each portfolio are segregated, and a shareholders interest is limited to the portfolio in which
shares are held.
2.
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Significant Accounting Policies:
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The following is a summary of the Significant Accounting Policies followed by the Portfolio.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the fair value of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ from those estimates and such differences could be material.
Security Valuation
Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available (except for securities traded
on NASDAQ), including securities traded over the counter, are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are traded, or, if there is no such reported sale, at the most recent quoted bid
price. For securities traded on NASDAQ, the NASDAQ Official Closing Price will be used. If available, debt securities are priced based upon valuations provided by independent, third-party pricing agents. Such values generally reflect the last
reported sales price if the security is actively traded. The third-party pricing agents may also value debt securities at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other
methodologies, designed to identify the market value for such securities. Debt obligations with
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OCTOBER 31, 2012
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remaining maturities of sixty days or less may be valued at their amortized cost, which approximates market value. The prices for foreign securities are reported in local currency and converted
to U.S. dollars using currency exchange rates. Prices for most securities held in the Portfolio are provided daily by recognized independent pricing agents. If a security price cannot be obtained from an independent, third-party pricing agent, the
Portfolio seeks to obtain a bid price from at least one independent broker.
Securities for which market prices
are not readily available are valued in accordance with Fair Value Procedures established by the Portfolios Board of Trustees (the Board). The Portfolios Fair Value Procedures are implemented through a Fair Value
Committee (the Committee) designated by the Board. Some of the more common reasons that may necessitate that a security be valued using Fair Value Procedures include: the securitys trading has been halted or suspended; the security
has been de-listed from a national exchange; the securitys primary trading market is temporarily closed at a time when under normal conditions it would be open; the security has not been traded for an extended period of time; the
securitys primary pricing source is not able or willing to provide a price; or trading of the security is subject to local government imposed restrictions. When a security is valued in accordance with the Fair Value Procedures, the Committee
will determine the value after taking into consideration relevant information reasonably available to the Committee.
Options for which the primary market is a national securities exchange are valued at the last quoted sale price on the primary exchange or market (foreign or domestic) on which they are
traded, or, if there is no such reported sale, at the most recent quoted bid price for long options and at the most recent ask price for written options. Options not traded on a national securities exchange are valued in accordance with Fair Value
Procedures established by the Board.
For securities that principally trade on a foreign market or exchange, a
significant gap in time can exist between the time of a particular securitys last trade and the time at which the Portfolio calculates its net asset value. The closing prices of such securities may no longer reflect their market value at the
time the Portfolio calculates its net asset value if an event that could materially affect the value of those securities (a Significant Event) has occurred between the time of the securitys last close and the time that the
Portfolio calculates net asset value. A Significant Event may relate to a single issuer or to an entire market sector. If the Adviser of the Portfolio becomes aware of a Significant Event that has occurred with respect to a security or group of
securities after the closing of the exchange or market on which the security or
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securities principally trade, but before the time at which the Portfolio calculates its net asset value, it may request that a Committee meeting be called. In addition, the Portfolios
Administrator monitors price movements among certain selected indices, securities and/or baskets of securities that may be an indicator that the closing prices received earlier from foreign exchanges or markets may not reflect market value at the
time the Portfolio calculates net asset value. If price movements in a monitored index or security exceed levels established by the Administrator, the Administrator notifies the Adviser that such limits have been exceeded. In such event, the adviser
makes the determination whether a Committee meeting should be called based on the information provided.
The
Portfolio uses Interactive Data Pricing and Reference Data, Inc., (Interactive Data) as a third party fair valuation vendor. Interactive Data provides a fair value for foreign securities in the Portfolio based on certain factors and
methodologies (involving, generally, tracking valuation correlations between the U.S. market and each non-U.S. security) applied by Interactive Data in the event that there is a movement in the U.S. market that exceeds a specific threshold
established by the Committee. The Committee establishes a confidence interval which is used to determine the level of correlation between the value of a foreign security and movements in the U.S. market before a particular security is
fair valued when the threshold is exceeded. In the event that the threshold established by the Committee is exceeded on a specific day, the Portfolio values its non-U.S. securities that exceed the applicable confidence interval based
upon the fair values provided by Interactive Data. In such event, it is not necessary to hold a Committee meeting. In the event that the Adviser believes that the fair values provided by Interactive Data are not reliable, the Adviser contacts the
Portfolios administrator and can request that a meeting of the Committee be held.
If a local market in
which the Portfolio owns securities is closed for one or more days, the Portfolio shall value all securities held in that corresponding currency based on the fair value prices provided by Interactive Data using the predetermined confidence interval
discussed above.
There were no securities in the Fund valued in accordance with fair value procedures as of
October 31, 2012.
In accordance with U.S. GAAP, the Portfolio discloses fair value of its investments in
a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a
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OCTOBER 31, 2012
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liability in an orderly transaction between market participants at the measurement date (an exit price). Accordingly, the fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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Level 1 Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that the Portfolio has the
ability to access at the measurement date
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Level 2 Other significant observable inputs (includes quoted prices for similar securities, interest rates, prepayment speeds,
credit risk, referenced indices, quoted prices in inactive markets, adjusted quoted prices in active markets, adjusted quoted prices on foreign equity securities that were adjusted in accordance with pricing procedures approved by the Board, etc.);
and
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Level 3 Prices, inputs or exotic modeling techniques which are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
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Effective May 1, 2012, the Portfolio adopted
Accounting Standards Update (ASU) No. 2011-04 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04
includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 requires reporting entities to disclose the following information for fair value measurements categorized within Level 3 of the
fair value hierarchy: quantitative information about the unobservable inputs used in the fair value measurement, the valuation processes used by the reporting entity, and a narrative description of the sensitivity of the fair value measurement to
changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, ASU 2011-04 requires reporting entities to make disclosures about amounts and reasons for all transfers in and out of Level 1 and Level 2 fair
value measurements. The adoption of ASU 2011-04 had no impact on the Portfolios net assets.
Investments are classified within the level of the lowest significant input considered in determining fair value.
Investments classified within Level 3 whose fair value measurement considers several inputs may include Level 1 or Level 2 inputs as components of the overall fair value measurement.
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McKEE INTERNATIONAL
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EQUITY PORTFOLIO
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OCTOBER 31, 2012
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As of October 31, 2012, all of the Portfolios investments were considered Level 1, in accordance with ASC-820.
For the year ended October 31, 2012, there have been no transfers between Level 1 and Level 2 assets and liabilities.
For the year ended October 31, 2012 there were no Level 3 securities.
For the year ended October 31,
2012, there have been no significant changes to the Portfolios fair valuation methodology.
Federal
Income Taxes
It is the Portfolios intention to continue to qualify as a regulated investment company for Federal income tax purposes by complying with the appropriate provisions of Subchapter M of the Internal Revenue Code of 1986,
as amended. Accordingly, no provisions for Federal income taxes have been made in the financial statements.
The Portfolio evaluates tax positions taken or expected to be taken in the course of preparing the Portfolios tax
returns to determine whether it is more-likely than-not (i.e., greater than 50-percent) that each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. Tax positions not
deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. The Portfolio did not record any tax provision in the current period. However, managements conclusions regarding tax positions
taken may be subject to review and adjustment at a later date based on factors including, but not limited to, examination by tax authorities (i.e., the last 3 open tax year ends, as applicable), on-going analysis of and changes to tax laws,
regulations and interpretations thereof.
As of and during the year ended October 31, 2012, the Portfolio
did not have a liability for any unrecognized tax benefits. The Portfolio recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year the Portfolio did not
incur any significant interest or penalties.
Security Transactions and Investment Income
Security transactions are accounted for on trade date. Costs used in determining realized gains and losses on the sale of investment securities are based on specific identification. Dividend income is recorded on the ex-dividend date. Interest
income is recognized on the accrual basis from settlement date. Certain dividends from foreign securities will be recorded as soon as the Portfolio is informed of the dividend if such information is obtained subsequent to the ex-dividend date.
Foreign Currency Translation
The books and records of the Portfolio are maintained in U.S.
dollars. Investment securities and other assets and liabilities
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McKEE INTERNATIONAL
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EQUITY PORTFOLIO
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OCTOBER 31, 2012
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denominated in a foreign currency are translated into U.S. dollars on the date of valuation. The Portfolio does not isolate that portion of realized or unrealized gains and losses resulting from
changes in the foreign exchange rate from fluctuations arising from changes in the market prices of the securities. These gains and losses are included in net realized and unrealized gains and losses on investments on the Statement of Operations.
Net realized and unrealized gains and losses on foreign currency transactions represent net foreign exchange gains or losses from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between trade
and settlement dates on securities transactions and the difference between the amount of the investment income and foreign withholding taxes recorded on the Portfolios books and the U.S. dollar equivalent of the amounts actually received or
paid.
Written Options
When a covered put or call option is written in the Portfolio, an amount
equal to the premium received by the Portfolio is included in the Portfolios Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option
written.
When a covered written call expires on its stipulated expiration date, or if the Portfolio enters
into a closing purchase transaction, the Portfolio will realize a gain (or loss if the cost of the closing purchase transaction exceeds the premium received when the call option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option will be extinguished. When a covered written call option is exercised, the Portfolio will realize a gain or loss from the sale of the underlying securities and the proceeds of the sale
are increased by the premium originally received.
When a covered written put expires, or if the Portfolio
enters into a closing purchase transaction, the Portfolio will realize a gain or loss on the option transaction and the liability related to such option is extinguished. When a put option is exercised, the Portfolio purchases the security, the cost
of the security is reduced by the premium originally received, and no gain or loss is recognized. Any realized or unrealized gains (losses) during the year are presented on the Statement of Operations. The Portfolio trades written option contracts
with off-balance sheet risk in the normal course of its investment activities in order to manage exposure to market risks. Risk of loss may exceed amounts recognized on the Statement of Assets and Liabilities. The measurement of the risks associated
with these instruments is meaningful only when all related and offsetting transactions are considered. The Portfolio will write covered call options against equity positions as a hedging strategy. As of October 31, 2012, the Portfolio had no
open written options contracts.
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Expenses
Most expenses of the Trust can be directly attributed to a particular portfolio. Expenses which cannot be directly attributed to a particular portfolio are
apportioned among the portfolios of the Trust based on the number of portfolios and/or relative net assets.
Dividends and Distributions to Shareholders
The Portfolio distributes substantially all of its net
investment income annually. Any net realized capital gains are distributed annually. All distributions are recorded on ex-dividend date.
Redemption Fees
The Portfolio retains redemption fees of 1.00% on redemptions of capital shares held for less than 180 days. For the years ended October 31, 2012 and
October 31, 2011 there were $147 and $1,746, respectively, in redemption fees retained by the Portfolio.
3.
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Transactions with Affiliates:
|
Certain officers of the Trust are also officers of SEI Investments Global Funds Services (the Administrator), a wholly owned subsidiary of SEI Investments Company, and/or SEI
Investments Distribution Co. (the Distributor). Such officers are paid no fees by the Trust, other than the Chief Compliance Officer (CCO) as described below, for serving as officers of the Trust.
The services provided by the (CCO) and his staff are paid for by the Trust as incurred. The services include regulatory
oversight of the Trusts Advisors and service providers as required by SEC regulations. The CCOs services and fees have been approved by and are reviewed by the Board.
4.
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Administration, Distribution, Shareholder Servicing, Custodian and Transfer Agent Agreements:
|
The Portfolio and the Administrator are parties to an Administration Agreement under which the Administrator provides management and
administration services for an annual fee equal to the higher of $125,000 for one portfolio, $250,000 for two portfolios, $350,000 for three portfolios, plus $75,000 per additional portfolio, plus $20,000 per additional class or 0.12% of the first
$250 million, 0.10% of the next $250 million, 0.08% on assets between $500 million and $1 billion and 0.06% of any amount above $1 billion of the Portfolios average daily net assets.
The Trust and the Distributor are parties to a Distribution Agreement. The Distributor receives no fees under the agreement.
Certain brokers, dealers, banks, trust companies and other financial representatives receive compensation from the Portfolio for providing a variety of services,
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McKEE INTERNATIONAL
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OCTOBER 31, 2012
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including record keeping and transaction processing. Such fees are based on the assets of the Portfolio that are serviced by the financial representative. Such fees are paid by the Portfolio to
the extent that the number of accounts serviced by the financial representative multiplied by the account fee charged by the Portfolios transfer agent would not exceed the amount that would have been charged had the accounts serviced by the
financial representative been registered directly through the transfer agent. All fees in excess of this calculated amount are paid by the C.S. McKee, L.P. (the Adviser). These fees are disclosed on the Statement of Operations as
Shareholder Servicing Fees.
Union Bank, N.A. acts as custodian (the Custodian) for the Portfolio. The Custodian
plays no role in determining the investment policies of the Portfolio or which securities are to be purchased or sold by the Portfolio.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for the Portfolio under a transfer agency agreement with the Trust.
During the year ended October 31, 2012, the Portfolio earned cash management credits of $15 which were used to offset transfer agent
expenses. This amount is labeled Fees Paid Indirectly on the Statement of Operations.
5.
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Investment Advisory Agreement:
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Under the terms of an investment advisory agreement, the Adviser provides investment advisory services to the Portfolio at a fee calculated at an annual rate of 0.70% of the
Portfolios average daily net assets.
6.
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Investment Transactions:
|
For the year ended October 31, 2012, the Portfolio made purchases of $21,797,320 and sales of $37,501,468 in investment securities other than long-term U.S. Government and short-term
securities. There were no purchases or sales of long term U.S. Government securities.
7.
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Federal Tax Information:
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The amount and character of income and capital gain distributions to be paid, if any, are determined in accordance with Federal income tax regulations, which may differ from U.S. GAAP.
These differences are primarily due to differing book and tax treatments for foreign currency transactions and a reclass of distributions.
Permanent book and tax basis differences relating to shareholder distributions may result in reclassifications to undistributed net investment income (loss), accumulated
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McKEE INTERNATIONAL
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EQUITY PORTFOLIO
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OCTOBER 31, 2012
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net realized gain (loss) and paid-in capital. Permanent differences are primarily attributable to foreign currency gain (loss) which has been classified to/from the following accounts:
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Undistributed
Net Investment
Loss
|
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Accumulated
Net Realized
Gain
|
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$
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(93,180
|
)
|
|
$
|
93,180
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These reclassifications have no impact on net assets or net asset value per share.
The tax character of dividends and distributions paid during the last two fiscal years was as follows:
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Ordinary
Income
|
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2012
|
|
$
|
6,980,983
|
|
2011
|
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3,717,780
|
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As of October 31, 2012, the components of Distributable Earnings on a tax basis were as follows:
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Undistributed Ordinary Income
|
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$
|
3,745,346
|
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Capital Loss Carry Forwards
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(12,513,886
|
)
|
Unrealized Appreciation
|
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|
36,546,130
|
|
|
|
|
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Total Distributable Earnings
|
|
$
|
27,777,590
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For Federal income tax purposes, capital losses incurred in taxable years beginning before December 22,
2010 may be carried forward for a maximum period of eight years and applied against future net capital gains. As of October 31, 2012, the Portfolio had the following capital loss carryforwards:
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Year Expiring
|
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Amount
|
|
2017
|
|
$
|
7,838,721
|
|
2018
|
|
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776,655
|
|
|
|
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Total
|
|
$
|
8,615,376
|
|
|
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During the fiscal year ended October 31, 2012, the Fund did not utilized capital loss carry forwards
to offset capital gains.
Under the recently enacted Regulated Investment Company Modernization Act of 2010, Funds will be
permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses
incurred in pre-enactment taxable years. As a result of this
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McKEE INTERNATIONAL
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EQUITY PORTFOLIO
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OCTOBER 31, 2012
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ordering rule, pre-enactment capital loss carry forwards may be more likely to expire unused. Additionally, post enactment capital losses that are carried forward will retain their character as
either short-term or long-term capital losses rather than being considered all short-term as under previous law.
Losses
carried forward under these new provisions are as follows:
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|
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|
|
|
|
|
|
|
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Short-Term
Loss
|
|
|
Long-Term
Loss
|
|
|
Total
|
|
$
|
2,134,962
|
|
|
$
|
1,763,548
|
|
|
$
|
3,898,510
|
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The Federal tax cost and aggregate gross unrealized appreciation and depreciation for the investments held
(excluding foreign currency) by the Portfolio at October 31, 2012, were as follows:
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|
|
|
|
|
|
|
|
|
|
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Federal
Tax Cost
|
|
|
Aggregate
Gross
Unrealized
Appreciation
|
|
|
Aggregate
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
|
|
$
|
180,093,160
|
|
|
$
|
49,598,708
|
|
|
$
|
(12,947,305
|
)
|
|
$
|
36,651,403
|
|
8.
|
Concentration of Risks:
|
The Portfolio invests in securities of foreign issuers in various countries. These investments may involve certain considerations and risks not typically associated with investments in the
United States as a result of, among other factors, the possibility of future political and economic developments and the level of governmental supervision and regulation of securities markets in the respective countries.
The Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on either income or gains
earned or repatriated. The Portfolio accrues and applies such taxes to net investment income, net realized gains and net unrealized gains as income and/or capital gains are earned.
At October 31, 2012, 45% of total shares outstanding were held by two record shareholders each owning 10% or greater of the aggregate
total shares outstanding. These shareholders were comprised of omnibus accounts that were held on behalf of multiple underlying shareholders.
In the normal course of business, the Portfolio enters into contracts that provide general indemnifications. The Portfolios maximum exposure under these arrangements is dependent on
future claims that may be made against the Portfolio
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and, therefore, cannot be established; however, based on experience, the risk of loss from such claim is considered remote.
10.
|
Loans of Portfolio Securities:
|
The Portfolio may lend portfolio securities having a market value up to one-third of the Portfolios total assets. Such loans are secured by collateral equal to no less than the
market value of the loaned securities determined daily. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any agencies. Cash collateral received in connection with these loans is invested in short-term
money market instruments. It is the Portfolios policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. The securities
lending agent and the borrower retain a portion of the earnings from the collateral investments, with the remainder being retained by the Fund. The Portfolio records securities lending income net of such allocations. Therefore, the value of the
collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Portfolio if and to the extent that the market value of the securities loans were to increase and the borrower did not
increase the collateral accordingly, and the borrower fails to return the securities. The Portfolio could also experience delays and costs in gaining access to the collateral. The Portfolio bears the risk of any deficiency in the amount of the
collateral available for return to the borrower due to any loss on the collateral invested. As of October 31, 2012, there were no securities on loan.
11.
|
Recent Accounting Pronouncement:
|
In December 2011, the Financial Accounting Standards Board issued a further update to the guidance
Balance Sheet Disclosures about Offsetting Assets and
Liabilities
. The amendments to this standard require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial
position. The amended guidance is effective for interim and annual reporting periods beginning after January 1, 2013. At this time, management is evaluating the implications of this update and its impact on the financial statements has not
been determined.
The Portfolio has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. Based on this
evaluation, no additional adjustments were required to the financial statements.
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OCTOBER 31, 2012
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