<PAGE>
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REPUBLIC
NEW YORK TAX-FREE BOND FUND
REPUBLIC
EQUITY FUND
REPUBLIC
FIXED INCOME FUND
REPUBLIC
INTERNATIONAL EQUITY FUND
REPUBLIC
SMALL CAP EQUITY FUND
[logo] PROSPECTUS
MARCH 1, 1997
<PAGE>
REPUBLIC FAMILY OF FUNDS:
FIXED INCOME FUND
NEW YORK TAX-FREE BOND FUND
EQUITY FUND
INTERNATIONAL EQUITY FUND
SMALL CAP EQUITY FUND
3435 STELZER ROAD, COLUMBUS, OHIO 43219-3035
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ACCOUNT AND GENERAL INFORMATION: (888) 525-5757 (TOLL FREE)
The Republic Funds (the "Trust") is an open-end investment management company
(a mutual fund) that currently offers a selection of seven portfolios, each of
which has different and distinct investment objectives and policies. The
Republic Advisor Funds Trust (the "Advisor Trust") is an open-end management
investment company that currently consists of three funds, each of which has
different and distinct investment objectives and policies. This prospectus
describes two investment portfolios offered by the Trust and three investment
portfolios offered by the Advisor Trust (the "Funds"), each of which is advised
or managed by Republic National Bank of New York ("Republic," "Manager" or
"Advisor"):
REPUBLIC FIXED INCOME FUND
REPUBLIC NEW YORK TAX-FREE BOND FUND
REPUBLIC EQUITY FUND
REPUBLIC INTERNATIONAL EQUITY FUND
REPUBLIC SMALL CAP EQUITY FUND
This Prospectus sets forth concisely the information concerning the Funds that
a prospective investor should know before investing. Investors should read this
Prospectus and retain it for future reference. The Trust and Advisor Trust have
filed with the Securities and Exchange Commission a Statement of Additional
Information, dated March 1, 1997, with respect to each of their respective
Funds, containing additional and more detailed information about the respective
Fund, each of which is hereby incorporated by reference into this Prospectus. An
investor may obtain a copy of a Statement of Additional Information without
charge by contacting the Fund at the address and telephone number printed above.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, REPUBLIC OR ANY OTHER BANK, AND THE SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS IS SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
Only shares of the Fixed Income Fund, International Equity Fund and Small Cap
Equity Fund and Class Y Shares (the "Adviser Shares") of the New York Tax-Free
Bond Fund and Equity Fund (collectively, the "Shares"), are being offered by
this Prospectus. The Trust offers one other class of shares of the New York
Tax-Free Bond Fund and Equity Fund pursuant to a separate prospectus. Shares of
the Fixed Income Fund, International Equity Fund and Small Cap Equity Fund are
offered primarily to clients of Republic National Bank of New York and its
affiliates for which Republic National Bank or its affiliates exercise
investment discretion.
UNLIKE OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES (MUTUAL FUNDS) WHICH
DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO OF SECURITIES, THE ADVISOR TRUST
SEEKS TO ACHIEVE THE INVESTMENT OBJECTIVES OF THE FIXED INCOME FUND,
INTERNATIONAL EQUITY FUND AND SMALL CAP EQUITY FUND (COLLECTIVELY, THE "ADVISOR
FUNDS", BY INVESTING ALL OF EACH FUND'S INVESTABLE ASSETS ("ASSETS") IN THE
FIXED INCOME PORTFOLIO, INTERNATIONAL EQUITY PORTFOLIO AND SMALL CAP EQUITY
PORTFOLIO, RESPECTIVELY, WHICH HAVE THE SAME INVESTMENT OBJECTIVE AS EACH
RESPECTIVE FUND. THE INVESTMENT EXPERIENCE OF EACH FUND WILL CORRESPOND DIRECTLY
WITH THE INVESTMENT EXPERIENCE OF THE CORRESPONDING PORTFOLIO. THE PORTFOLIOS
ARE DIVERSIFIED SERIES OF THE REPUBLIC PORTFOLIOS (THE "PORTFOLIO TRUST"), WHICH
IS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. SEE "SPECIAL INFORMATION
CONCERNING THE TWO-TIER FUND STRUCTURE".
Republic is the investment manager of the Fixed Income Portfolio,
International Equity Portfolio, Small Cap Equity Portfolio (collectively, the
"Portfolios") and the Equity Fund. Republic is also the investment advisor to
the New York Tax-Free Bond Fund. Miller Anderson & Sherrerd ("MAS"), Capital
Guardian Trust Company ("CGTC"), and MFS Institutional Advisors, Inc. ("MIA"), a
wholly owned subsidiary of Massachusetts Financial Services Company,
continuously manage the investment portfolios of the Fixed Income Portfolio, the
International Equity Porfolio and the Small Cap Equity Portfolio, respectively.
Alliance Capital Management L.P. ("Alliance") and Brinson Partners, Inc.
("Brinson") continuously manage the investment portfolio of the Equity Fund
(MAS, CGTC, MIA, Alliance and Brinson are collectively, the "Sub-Advisers").
Shares of each Fund are continuously offered for sale at net asset value with
no sales charge by BISYS Fund Services ("BISYS", the "Distributor" or the
"Sponsor") to customers of a financial institution, such as a federal or
state-chartered bank, trust company or savings and loan association that has
entered into a shareholder servicing agreement with the Trust or Advisor Trust
(collectively, "Shareholder Servicing Agents"). At present, the only Shareholder
Servicing Agents are Republic and its affiliates.
AN INVESTOR WHO IS NOT PURCHASING DIRECTLY FROM THE DISTRIBUTOR SHOULD OBTAIN
FROM HIS SHAREHOLDER SERVICING AGENT, AND SHOULD READ IN CONJUNCTION WITH THIS
PROSPECTUS, MATERIALS DESCRIBING THE PROCEDURES UNDER WHICH SHARES MAY BE
PURCHASED AND REDEEMED THROUGH SUCH SHAREHOLDER SERVICING AGENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 1, 1997
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HIGHLIGHTS
THE FUNDS PAGE 1
Republic New York Tax-Free Bond Fund and Republic Equity Fund (collectively,
the "Trust Funds") are separate series of Republic Funds (the "Trust"), a
Massachusetts business trust organized on April 22, 1987, which currently
consists of seven portfolios, each of which has different and distinct
investment objectives and policies. Republic Fixed Income Fund, Republic
International Equity Fund and Republic Small Cap Equity Fund (collectively, the
"Advisor Funds") are separate series of Republic Advisor Funds Trust (the
"Advisor Trust"), a Massachusetts business trust organized on April 5, 1996,
which currently consists of three funds, each of which has different and
distinct investment objectives and policies. The Fixed Income Fund and
International Equity Fund are the successors to the Republic Fixed Income Fund
and Republic International Equity Fund, respectively, each a series of Republic
Funds (the "Predecessor Funds") each of which commenced investment operations on
January 9, 1995. The Fixed Income Fund and International Equity Fund each
assumed all of the assets and liabilities of their respective Predecessor Fund.
INVESTMENT OBJECTIVES, POLICIES
AND RISK FACTORS PAGES 13 AND 24
The investment objective of the Fixed Income Fund is to realize above-
average total return over a market cycle of three to five years, consistent with
reasonable risk, through investment primarily in a diversified portfolio of U.S.
Government securities, corporate bonds, mortgage-backed securities and other
fixed-income securities. The Advisor Trust seeks to achieve the investment
objective of the Fixed Income Fund by investing all of the Fund's investible
assets in the Fixed Income Portfolio, which has the same investment objective as
the Fund. The Fixed Income Portfolio's average weighted maturity will ordinarily
exceed five years.
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Fund with monthly dividends exempt from regular federal, New
York State and New York City personal income taxes as well as to protect the
value of its shareholders' investment. The Trust seeks to achieve the investment
objective of the New York Tax-Free Bond Fund by investing the assets of the Fund
primarily in a non-diversified portfolio of municipal bonds and notes and other
debt instruments the interest on which is exempt from regular federal, New York
State and New York City personal income taxes. The potential risks of investing
in New York Municipal obligations are discussed in "Additional Risk Factors and
Policies -- Risk Factors Affecting Investments in New York Municipal
Obligations".
In seeking its investment objective, the New York Tax-Free Bond Fund may
invest in variable rate instruments and "when-issued" municipal obligations. The
potential risks of investing in these derivative instruments are discussed in
"Additional Risk Factors and Policies -- Variable Rate Instruments" and
"Additional Risk Factors and Policies -- Firm Commitment Agreements and When-
Issued Securities and Municipal Obligations".
The investment objective of the Equity Fund is long-term growth of capital and
income without excessive fluctuations in market value. The Equity Fund will
normally invest in equity securities of large, seasoned companies in sound
financial condition with larger intermediate capitaliztion which are expected to
show above-average price appreciation.
The investment objective of the International Equity Fund is to seek long-term
growth of capital and future income through investment primarily in securities
of non-U.S. issuers (including American Depository Receipts ("ADRs") and U.S.
registered securities) and securities whose principal markets are outside of the
United States. The Advisor Trust seeks to achieve the investment objective of
the International Equity Fund by investing all of the Fund's investible assets
in the International Equity Portfolio, which has the same investment objective
as the Fund.
The investment objective of the Small Cap Equity Fund is to seek long-term
growth of capital by investing, under normal market conditions, at least 80% of
its investible assets in equity securities of small- and medium-sized companies
that are early in their life cycle but which may have potential to become major
enterprises ("emerging growth companies"). The Advisor Trust seeks to achieve
the investment objective of the Small Cap Equity Fund by investing all of the
Fund's investible assets in the Small Cap Equity Portfolio, which has the same
investment objective as the Fund.
The Fixed Income Portfolio, International Equity Portfolio, and Small Cap
Equity Portfolio are series of Republic Portfolios (the "Portfolio Trust"), a
master trust fund established under the law of the State of New York and
organized on November 1, 1994.
There can be no assurance that the investment objectives of the Funds or the
Portfolios will be achieved.
MANAGEMENT OF THE TRUST, THE ADVISOR TRUST
AND THE PORTFOLIO TRUST PAGE 47
Republic acts as investment manager to the Portfolios pursuant to Investment
Management Contracts with the Portfolio Trust. For its services, the Manager is
entitled to receive from the Fixed Income Portfolio a fee at the annual rate of
0.20% of the Portfolio's average daily net assets and from each of the
International Equity Portfolio and the Small Cap Equity Portfolio a fee at the
annual rate of 0.25% of each Portfolio's average daily net assets. The Manager
is currently waiving these fees.
Republic also acts as investment adviser to the New York Tax-Free Bond Fund
and as investment manager to the Equity Fund. For its services, each of these
Funds pays the Manager a fee at the annual rate of 0.25% of the New York
Tax-Free Bond Fund's average daily net assets and a fee at the annual rate of
0.175% of the Equity Fund's average daily net assets, respectively. Republic is
currently waiving the fee for the New York Tax-Free Bond Fund. See "Management
of Trust, the Adviser Trust and Portfolio Trust".
MAS continuously manages the investment portfolio of the Fixed Income
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, MAS is paid a fee by the Fixed Income Portfolio, computed daily and
based on the Portfolio's average daily net assets, equal on an annual basis to
0.375% on net assets of the Portfolio, subject to certain breakpoints on assets
in excess of $50 million. See "Management of Trust, the Adviser Trust and
Portfolio Trust".
Alliance and Brinson each continuously manage a portion of the investment
portfolio of the Equity Fund pursuant to a Subadvisory Agreement with the
Manager. The Manager determines the allocation of the Equity Fund's Assets
between Alliance and Brinson. For its services, Alliance and Brinson are each
paid a fee by the Equity Fund, computed daily and based on the Fund's average
daily net assets, equal on an annual basis to 0.325% of the average daily net
assets of the Fund allocated to each Sub-Adviser for management, subject to
certain breakpoints on assets allocated to each Sub-Adviser in excess of $50
million. See "Management of Trust, the Adviser Trust and Portfolio Trust".
CGTC continuously manages the investment portfolio of the International Equity
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, CGTC is paid a fee by the International Equity Portfolio, computed
daily and based on the Portfolio's average daily net assets, equal on an annual
basis to 0.70% of the average daily net assets of the Portfolio, subject to
certain breakpoints on assets in excess of $25 million. See "Management of
Trust, the Adviser Trust and Portfolio Trust".
MIA continuously manages the investment portfolio of the Small Cap Equity
Portfolio pursuant to a Sub-Advisory Agreement with the Manager. For its
services, MAM is paid a fee by the Small Cap Equity Portfolio, computed daily
and based on the Portfolio's average daily net assets, equal on an annual basis
to 0.75% of average daily net assets of the Portfolio, subject to certain
breakpoints on assets in excess of $50 million. See "Management of the Trust,
the Adviser Trust and the Portfolio Trust".
BISYS acts as sponsor and as administrator of the Funds (the "Fund
Administrator") and distributor of the Shares of each Fund. For its services to
the New York Tax-Free Bond Fund and the Equity Fund, the Fund Administrator
receives a fee from each Fund equal on an annual basis to 0.10% of the Fund's
average daily net assets, subject to certain breakpoints on assets in excess of
$1 billion. For its services to the Fixed Income Fund, International Equity Fund
and Small Cap Equity Fund, the Fund Administrator receives from each Fund a fee
payable monthly equal on an annual basis to 0.05% of the Fund's average daily
net assets, subject to certain breakpoints on assets in excess of $1 billion.
BISYS Fund Services (Ireland) Limited ("BISYS Ireland") acts as administrator of
the Portfolios (the "Portfolios Administrator"). For its services to the
Portfolios, the Portfolios' Administrator receives from each Portfolio a fee
payable monthly equal on an annual basis to 0.05% of each Portfolio's average
daily net assets subject to certain breakpoints on assets in excess of $1
billion. See "Management of Trust, the Adviser Trust and the Portfolio Trust".
PURCHASE AND REDEMPTION OF SHARES PAGES 59 AND 61
Shares of the Funds are continuously offered for sale by the Distributor at
net asset value with no sales charge to customers of a financial institution,
such as a federal or state-chartered bank, trust company or savings and loan
association, that has entered into a shareholder servicing agreement with the
Trust or Advisor Trust (collectively, "Shareholder Servicing Agents"). The
minimum initial investment is $1,000 and the minimum subsequent investment is
$100. With respect to the Advisor Funds, the Funds may accept initial and
subsequent investments of lesser amounts in its discretion. No minimum is
imposed on reinvested dividends. The Trust and Advisor Trust each offer to buy
back (redeem) Shares from shareholders of the Funds at any time at net asset
value. See "Purchase of Shares" and "Redemption of Shares." Shares of the Equity
Fund are offered in connection with tax-deferred retirement plans. See
"Retirement Plans".
DIVIDENDS AND DISTRIBUTIONS PAGE 62
For the Fixed Income Fund and the New York Tax-Free Bond Fund, the Trust and
Advisor Trust each declare all of each Fund's net investment income daily as a
dividend to each Fund's shareholders and distributes all such dividends monthly.
For the Equity Fund, dividends equal to all the Fund's net investment income
earned are distributed quarterly to the Fund's shareholders of record. For the
International Equity Fund and Small Cap Equity Fund, such dividends are
distributed annually and semi-annually, respectively. Any net realized capital
gains are distributed at least annually. All distributions by a Fund will be
invested in additional shares of the Fund, unless the shareholder instructs the
Fund otherwise. See "Dividends and Distributions."
<PAGE>
FEE TABLE
The following table provides a summary of estimated expenses relating to
purchases and sales of Shares, and the aggregate annual operating expenses of
each Fund, and their corresponding Portfolio as a percentage of the average
daily net assets of each Fund. The fiscal year ends of the Funds and the
Portfolios are each October 31. The example illustrates the dollar cost of such
estimated expenses on a $1,000 investment in each Fund. The Trustees of the
Advisor Trust believe that the aggregate per share expenses of the Fixed Income
Fund, International Equity Fund and Small Cap Equity Fund and the corresponding
Portfolios will be less than or approximately equal to the expenses which the
Advisor Funds would incur if the Advisor Trust retained the services of an
investment adviser on behalf of the Advisor Funds and the Assets of each Advisor
Fund were invested directly in the type of securities being held by the
corresponding Portfolio. Historical information in the expense table regarding
investment advisory/management fees and expenses has been restated to reflect
expected fee waivers and expenses for the current fiscal year.
<TABLE>
<CAPTION>
FIXED NEW YORK INTERNATIONAL SMALL CAP
INCOME TAX-FREE EQUITY EQUITY EQUITY
FUND BOND FUND FUND FUND FUND
---- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses ... None None None None None
Annual Fund Operating Expenses
Investment Advisory/Management
Fees after waiver* ............. 0.35% 0.00% 0.50% 0.50% 0.66%
Distribution Fees (Rule 12b-1 fees) None None None None None
Other Expenses ................... 0.63% 0.85% 0.55% 0.71% 0.39%
---- ---- ---- ---- ----
-- Administrative Services Fee ... 0.10% 0.10% 0.10% 0.10% 0.10%
-- Other Operating Expenses ...... 0.53% 0.75% 0.45% 0.61% 0.29%
Total Fund Operating Expenses after
fee waivers and expense
reimbursements** ................. 0.98% 0.85% 1.05% 1.21% 1.05%
==== ==== ==== ==== ====
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*With the exception of the Equity Fund, Investment Advisory Management Fees are shown net of waivers. Without such
waivers, the Investment Advisory/ Management Fees would be equal on an annual basis to 0.55%, 0.25%, 0.75% and
0.91% of the average net assets of the Fixed Income Fund, New York Tax-Free Bond Fund, International Equity Fund
and the Small Cap Equity Fund, respectively. See "Management of the Trust, the Adviser Trust and the Portfolio
Trust" for a description of the Investment Advisory/Management Fees payable to the Manager and each of the
Sub-Advisors. There can be no assurance that fees will be waived in the future. The Manager anticipates that it
will reduce or eliminate the fee waivers during the current fiscal year if it can be so without materially
increasing Total Fund Operating Expenses as a percentage of average daily net assets.
**With the exception of the Equity Fund, Total Fund Operating Expenses are shown net of fee waivers and expense
reimbursements. Without such fee waivers and expense reimbursements, the Total Fund Operating Expenses would be
equal on an annual basis to 1.26% of the Fixed Income Fund's average daily net assets, 1.59% of the New York
Tax-Free Bond Fund's average daily net assets, 1.46% of the International Equity Fund's average daily net
assets, and 1.30% of the Small Cap Equity Fund's average daily net assets. There can be no assurance that fees
will be waived or expenses reimbursed in the future.
</TABLE>
EXAMPLE
A shareholder of the New York Tax-Free Bond Fund, Equity Fund, Fixed Income
Fund, International Equity Fund or Small Cap Equity Fund would pay the following
expenses on a $1,000 investment in Fund Shares, assuming (1) 5% annual return
and (2) redemption at the end of:
<TABLE>
<CAPTION>
FIXED NEW YORK INTERNATIONAL SMALL CAP
INCOME TAX-FREE EQUITY EQUITY EQUITY
FUND BOND FUND FUND FUND FUND
---- --------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 year ............................. $ 10 $ 9 $ 11 $ 12 $ 11
3 years ............................ $ 31 $ 27 $ 33 $ 38 $ 33
5 years ............................ $ 54 $ 47 $ 58 $ 66 $ 58
10 years ............................ $120 $105 $128 $146 $128
</TABLE>
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE AGGREGATE EXPENSES OF THE FUNDS AND THE PORTFOLIOS, AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the expense tables provided above is to assist investors in
understanding the expenses of investing in a Fund and an investor's share of the
aggregate operating expenses of the Portfolios, if applicable. The information
is based on the expenses the Funds, and their corresponding Portfolios, if
applicable, expect to incur for the current fiscal year. The expense table shows
the expected investment advisory/management fee, distribution (Rule 12b-1) fee
and administrative services fee. For a more detailed discussion of the costs and
expenses of investing in the Funds, see "Management of the Trust and the
Portfolio Trust."
Some Shareholder Servicing Agents may impose certain conditions on their
customers, subject to the terms of this Prospectus, in addition to or different
from those imposed by the Trust or Advisor Trust with respect to the Funds, such
as requiring a minimum initial investment or charging their customers a direct
fee for their services. The effect of any such fees will be to reduce the net
return on the investment of customers of that Shareholder Servicing Agent. Each
Shareholder Servicing Agent has agreed to transmit to shareholders who are its
customers appropriate written disclosure of any transaction fees that it may
charge them directly at least 30 days before the imposition of any such charge.
FINANCIAL HIGHLIGHTS
The financial data shown below is to assist investors in evaluating the
performance of the Funds' Shares (Class Y or "Adviser" Shares for the New York
Tax-Free Bond Fund and Equity Fund) since commencement of operations through
October 31, 1996. The Fixed Income Fund and International Equity Fund are the
successors to Republic Fixed Income Fund and Republic International Equity Fund,
each a series of Republic Funds (the "Predecessor Funds") which each commenced
investment operations on January 9, 1995. The Fixed Income Fund and
International Equity Fund each assumed all of the assets and liabilities of
their respective Predecessor Fund in a reorganization effective August 1, 1996.
The information shown in the following schedule for the year or period ended
October 31, 1996 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report on each Fund's financial statements is incorporated by
reference into the Statement of Additional Information from each Fund's Annual
Report dated October 31, 1996. The Annual Report also includes management's
discussion of Fund performance, and may be obtained without charge upon request.
This information should be read in conjunction with the financial statements.
The information for the Funds for the periods ended October 31, 1995 was
audited by the Funds' former independent auditors who expressed an unqualified
opinion thereon.
<PAGE>
SELECTED DATA FOR A SHARE OUTSTANDING
THROUGHOUT THE INDICATED PERIOD:
<TABLE>
<CAPTION>
REPUBLIC REPUBLIC
NEW YORK SMALL
REPUBLIC TAX-FREE REPUBLIC REPUBLIC INTERNATIONAL CAP EQUITY
FIXED INCOME FUND BOND FUND EQUITY FUND EQUITY FUND FUND
---------------------------------- ------------- ------------- --------------------------- -------------
FOR THE FOR THE FOR THE PERIOD FOR THE PERIOD
PERIOD PERIOD JANUARY 9, SEPTEMBER 3,
JULY 1, 1996 JULY 1, 1996 1995 1996
FOR THE PERIOD (DATE OF (DATE OF FOR THE (COMMENCEMENT (COMMENCEMENT
FOR THE YEAR JANUARY 9, 1995 INITIAL INITIAL YEAR OF OPERATIONS) OF OPERATIONS)
ENDED (COMMENCEMENT OFFERING) OFFERING) ENDED THROUGH TO
OCTOBER 31, OF OPERATIONS) TO OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 OCTOBER 31, 1995 1996 1996 1996 1995 1996
------------- ------------------- ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.96 $ 10.00 $ 10.18 $ 11.49 $ 10.80 $ 10.00 $ 10.00
------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment
income .......... 0.59 0.46 0.16 0.08 0.11 0.08 --
Net realized and
unrealized gain
on investments or
from Portfolio .. 0.08 0.96 0.12 0.42 1.31 0.75 0.63
------- ------- ------- ------- ------- ------- -------
Total from
investment
operations ...... 0.67 1.42 0.28 0.50 1.42 0.83 0.63
------- ------- ------- ------- ------- ------- -------
Less dividends:
From net investment
income .......... (0.59) (0.46) (0.16) (0.06) (0.16) (0.03) --
Net realized
capital gain .... (0.37) -- -- -- (0.01) -- --
------- ------- ------- ------- ------- ------- -------
Total
distributions . (0.96) (0.46) (0.16) (0.06) (0.17) (0.03) --
------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period ......... $ 10.67 $ 10.96 $ 10.30 $ 11.93 $ 12.05 $ 10.80 $ 10.63
======= ======= ======= ======= ======= ======= =======
Total return(a) ..... 6.51% 14.37% 5.02%(c) 4.72% 13.22% 8.31% 6.30%
Ratios/supplemental data:
Net assets, end of
period (in 000's) $42,424 $26,128 $ 8,233 $33,155 $96,977 $34,244 $92,842
Ratio of expenses
to average net
assets* ......... 0.83% 0.91%(b) 0.60%(b) 0.66%(b) 1.11% 1.14%(b) 0.91%(b)
Ratio of net
investment income
to average net
assets* ......... 5.51% 5.63%(b) 4.78%(b) 1.93%(b) 0.99% 1.26%(b) (0.28%)(b)
Portfolio turnover
rate(d) ......... 152% 100% 178%(e) 86%(e) 23% 3% 51%
Average commission
rate(d) ......... N/A N/A N/A $0.0599(e) $0.0041 N/A $0.0542
(Footnotes on following page)
<PAGE>
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*Reflects a voluntary expense limitation and waiver of fees by affiliated parties of the Funds. If this limitation and waiver had
not been in effect, the annualized ratios of expenses and net investment income to average net assets for the Fixed Income Fund
for the year ended October 31, 1996 and the period from January 9, 1995 (commencement of operations) to October 31, 1995 would
have been 1.06% and 5.28% and 1.72% and 4.82%, respectively, for the New York Tax-Free Bond Fund for the period from July 1,
1996 (date of initial offering) to October 31, 1996 would have been 2.26% and 3.12%, respectively, for the Equity Fund for the
period from July 1, 1996 (date of initial offering) to October 31, 1996 would have been 0.97% and 1.62%, respectively, for the
International Equity Fund for the year ended October 31, 1996 and the period from January 9, 1995 (commencement of operations)
to October 31, 1995 would have been 1.13% and 0.96% and 2.12% and 0.28%, respectively, and for the Small Cap Equity Fund for
the period from September 3, 1996 (commencement of operations) to October 31, 1996 would have been 1.17% and (0.54%),
respectively. Includes the respective Fund's share of operating expenses of the respective Portfolios, as appropriate.
(a)For the year or period indicated.
(b)Annualized.
(c)Represents total return for the Class C ("Investor") shares from November 1, 1995 to June 30, 1996, plus the total return for
the Class Y ("Adviser") shares from July 1, 1996 to October 31 1996.
(d)Portfolio turnover and average commission rates, if applicable, for the Fixed Income Fund, International Equity Fund and Small
Cap Equity Fund represent those of each Fund's respective Portfolio for the years or periods indicated.
(e)Represents rate for the entire Fund for the year ended October 31, 1996.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The investment objective of the Fixed Income Fund is to realize above-average
total return over a market cycle of three to five years, consistent with
reasonable risk, through investment in a diversified portfolio of U.S.
Government securities, corporate bonds (including bonds rated below investment
grade commonly referred to as "junk bonds"), foreign fixed income securities,
mortgage-backed securities of domestic issuers and other fixed-income
securities. The Fixed Income Portfolio's average weighted maturity will
ordinarily exceed five years. The investment objective of the Fixed Income
Portfolio is the same as the investment objective of the Fixed Income Fund.
The investment objective of the New York Tax-Free Bond Fund is to provide
shareholders of the Fund with monthly dividends exempt from regular federal, New
York State and New York City personal income taxes as well as to protect the
value of its shareholders' investment.
The investment objective of the Equity Fund is to seek long-term growth of
capital and income without excessive fluctuations in market value. The Equity
Fund will normally invest in equity securities of large, seasoned companies with
large or intermediate capitalization in sound financial condition which are
expected to show above-average price appreciation.
The investment objective of the International Equity Fund is to seek long-term
growth of capital and future income through investment primarily in securities
of non-U.S. issuers (including ADRs and U.S. registered securities) and
securities whose principal markets are outside of the United States. The
investment objective of the International Equity Portfolio is the same as the
investment objective of the International Equity Fund.
The investment objective of the Small Cap Equity Fund is to seek long-term
growth of capital by investing primarily in equity securities of small- and
medium-sized companies that are early in their life cycle but which may have
potential to become major enterprises ("Emerging Growth Companies"). The
investment objective of the Small Cap Equity Portfolio is the same as the
investment objective of the Small Cap Equity Fund.
There can be no assurance that the investment objectives of the Funds will be
achieved. The investment objectives of each of the Funds and the Portfolios, if
applicable, may be changed without investor approval. If there is a change in
the investment objective of a Fund, shareholders should consider whether the
Fund remains an appropriate investment in light of their then-current financial
position and needs. Shareholders of the Funds shall receive 30 days' prior
written notice of any change in the investment objectives of the Funds or the
Portfolios, if applicable.
INVESTMENT POLICIES
Since the investment characteristics of the Fixed Income Fund, International
Equity Fund and Small Cap Equity Fund will correspond to those of their
respective Portfolio, the following also includes a discussion of the various
investment policies of the Portfolios.
FIXED INCOME FUND. The investment characteristics of the Bond Fund correspond
to those of the Fixed Income Portfolio. The Fixed Income Portfolio will normally
invest at least 65% of its total assets in fixed income securities. The Fixed
Income Portfolio may invest in the following securities, which may be issued by
domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued, sponsored or guaranteed by the U.S. government,
its agencies or instrumentalities (U.S. Government securities); corporate debt
securities; corporate commercial paper; mortgage pass-throughs, mortgage-backed
bonds, collateralized mortgage obligations ("CMOs") and other asset-backed
securities; variable and floating rate debt securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; obligations
of international agencies or supranational entities; and foreign currency
exchange-related securities.
MAS (the "Fixed Income Sub-Adviser") will seek to achieve the Fixed Income
Portfolio's objective by investing at least 80% of the Portfolio's assets in
investment grade debt or fixed income securities. Investment grade debt
securities are those rated by one or more nationally recognized statistical
rating organizations ("NRSROs") within one of the four highest quality grades at
the time of purchase (e.g., AAA, AA, A or BBB by Standard & Poor's Ratings
Group, Inc. ("S&P") or Fitch Investors Service, Inc. ("Fitch") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's")), or in the case of unrated
securities, determined by the Fixed Income Sub-Adviser to be of comparable
quality. Securities rated by a NRSRO in the fourth highest rating category have
speculative characteristics and are subject to greater credit and market risks
than higher-rated bonds. See Appendix A to this Prospectus for a description of
the ratings assigned by Moody's, S&P, and Fitch.
Up to 20% of the Fixed Income Portfolio's assets may be invested in preferred
stock, convertible securities, and in fixed income securities that at the time
of purchase are rated Ba or B by Moody's or BB or B by S&P or rated comparably
by another NRSRO (or, if unrated, are deemed by the Fixed Income Sub-Adviser to
be of comparable quality). Securities rated below "investment grade," i.e.,
rated below Baa by Moody's or BBB by S&P, are described as "speculative" by both
Moody's and S&P. Such securities are sometimes referred to as "junk bonds," and
may be subject to greater market fluctuations, less liquidity and greater risk.
For a complete discussion of the special risks associated with investments in
lower rated securities, see "Additional Risk Factors and Policies -- High
Yield/High Risk Securities."
From time to time, the Fixed Income Sub-Adviser may invest more than 50% of
the Fixed Income Portfolio's assets in mortgage-backed securities including
mortgage pass-through securities, mortgage-backed bonds and CMOs, that carry a
guarantee from a U.S. government agency or a private issuer of the timely
payment of principal and interest. For a description of the risks associated
with mortgage-backed securities, see "Additional Risk Factors and Policies --
Mortgage Related Securities." When investing in mortgage-backed securities, it
is expected that the Fixed Income Portfolio's primary emphasis will be in
mortgage-backed securities issued by governmental and government-related
organizations such as the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Association ("FHLMC"). However, the Fixed Income Portfolio may invest
without limit in mortgage-backed securities of private issuers when the Fixed
Income Sub-Adviser determines that the quality of the investment, the quality of
the issuer, and market conditions warrant such investments. Mortgage-backed
securities issued by private issuers will be rated investment grade by Moody's
or S&P or, if unrated, deemed by the Fixed Income Sub-Adviser to be of
comparable quality.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. The bondholder has a first priority perfected security
interest in collateral consisting usually of agency mortgage pass-through
securities, although other assets including U.S. Treasury securities (including
zero coupon Treasury bonds), agency securities, cash equivalent securities,
whole loans and corporate bonds may qualify. The amount of collateral must be
continuously maintained at levels from 115% to 150% of the principal amount of
the bonds issued, depending on the specific issue structure and collateral type.
For a complete discussion of mortgage-backed securities, see "Additional Risk
Factors and Policies -- Mortgage-Related Securities."
A portion of the Fixed Income Portfolio's assets may be invested in bonds and
other fixed income securities denominated in foreign currencies if, in the
opinion of the Fixed Income Sub-Adviser, the combination of current yield and
currency value offer attractive expected returns. These holdings may be in as
few as one foreign currency bond market (such as the United Kingdom gilt
market), or may be spread across several foreign bond markets. The Fixed Income
Portfolio may also purchase securities of developing countries; however, the
Portfolio does not intend to invest in the securities of Eastern European
countries. When the total return opportunities in a foreign bond market appear
attractive in local currency terms, but where, in the Fixed Income Sub-Adviser's
judgment, unacceptable currency risk exists, currency futures, forwards and
options and swaps may be used to hedge the currency risk. See "Additional Risk
Factors and Policies -- Foreign Securities" below and the Statement of
Additional Information.
The Fixed Income Portfolio may invest in Eurodollar bank obligations and
Yankee bank obligations. See "Additional Risk Factors and Policies -- Eurodollar
and Yankee Bank Obligations" below. The Fixed Income Portfolio may also invest
in Brady Bonds, which are issued as a result of a restructuring of a country's
debt obligations to commercial banks under the "Brady Plan". See "Additional
Risk Factors and Policies -- Brady Bonds" below. The Portfolio may also invest
in the following instruments on a temporary basis when economic or market
conditions are such that the Fixed Income Sub-Adviser deems a temporary
defensive position to be appropriate: time deposits, certificates of deposit and
bankers' acceptances issued by a commercial bank or savings and loan
association; commercial paper rated at the time of purchase by one or more NRSRO
in one of the two highest categories or, if not rated, issued by a corporation
having an outstanding unsecured debt issue rated high-grade by a NRSRO;
short-term corporate obligations rated high-grade by a NRSRO; U.S. Government
obligations; Government agency securities issued or guaranteed by U.S.
Government-sponsored instrumentalities and federal agencies; and repurchase
agreements collateralized by the securities listed above. The Fixed Income
Portfolio may also purchase securities on a when-issued basis, lend its
securities to brokers, dealers, and other financial institutions to earn income
and borrow money for temporary or emergency purposes.
NEW YORK TAX-FREE BOND FUND. The Adviser seeks to achieve the investment
objective of the New York Tax-Free Bond Fund by investing the assets of the Fund
primarily in municipal bonds and notes and other debt obligations issued by or
on behalf of the State of New York, other states, territories and possessions of
the United States, and their authorities, agencies, instrumentalities and
political subdivisions, the interest on which is exempt from regular federal
income taxes. (Such obligations, whether or not the interest thereon is subject
to the federal alternative minimum tax, are referred to herein as "Municipal
Obligations".) The Adviser invests on behalf of the New York Tax-Free Bond Fund
in certain Municipal Obligations of the State of New York and its authorities,
agencies, instrumentalities and political subdivisions, and of Puerto Rico,
other U.S. territories and their authorities, agencies, instrumentalities and
political subdivisions, the interest on which is exempt from regular federal,
New York State and New York City personal income taxes ("New York Municipal
Obligations"). In determining the tax status of interest on Municipal
Obligations and New York Municipal Obligations, the Adviser relies on opinions
of bond counsel who may be counsel to the issuer of those obligations.
Although under normal circumstances, the Adviser attempts to invest 100%, and
does invest at least 65%, of the New York Tax-Free Bond Fund's assets in New
York Municipal Obligations, market conditions may from time to time limit the
availability of such obligations. To the extent that acceptable New York
Municipal Obligations are not available for investment, the Adviser may purchase
on behalf of the New York Tax-Free Bond Fund Municipal Obligations issued by
other states, their authorities, agencies, instrumentalities and political
subdivisions, the interest income on which is exempt from regular federal income
tax but is subject to New York State and New York City personal income taxes. As
a fundamental policy the Adviser will invest at least 80% of the New York
Tax-Free Bond Fund's net assets in tax exempt obligations. As a temporary
defensive measure, the Adviser may invest up to 20% of the New York Tax-Free
Bond Fund's total assets in obligations the interest income on which is subject
to regular federal, New York State and New York City personal income taxes or
the federal alternative minimum tax. Also, as a temporary defensive measure
during times of adverse market conditions, assets of the New York Tax-Free Bond
Fund may be held in cash or invested in the short-term obligations described
below, the interest income on which is taxable to shareholders as ordinary
income for federal and New York State and New York City personal income tax
purposes.
All of the investments of the New York Tax-Free Bond Fund are made in:
(1) Municipal bonds that at the date of purchase are rated Aaa, Aa, A or Baa
by Moody's, AAA, AA, A or BBB by S&P's or AAA, AA, A or BBB by Fitch or, if
not rated by any of these rating agencies, are of comparable quality as
determined by the Adviser;
(2) Municipal notes that at the date of purchase are rated MIG 1/VMIG 1 or
MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by S&P or F-1+, F-1 or F-2 by
Fitch or, if not rated by any of these rating agencies, are of comparable
quality as determined by the Adviser;
(3) Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; and
(4) Commercial paper that at the date of purchase is rated Prime-1 or
Prime-2 by Moody's, A-1+, A-1 or A-2 by S&P or F-1+, F-1 or F-2 by Fitch or,
if not rated by any of these rating agencies, is of comparable quality as
determined by the Adviser, obligations (including certificates of deposit,
bankers' acceptances and repurchase agreements) of banks with at least $1
billion of assets, and cash.
Municipal bonds rated Baa by Moody's or BBB by S&P or Fitch may have some
speculative elements. In evaluating the creditworthiness of an issue, whether
rated or unrated, the Adviser takes into consideration, among other factors, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility financed by
the issue, the quality of the issuer's management, and legal and regulatory
matters. For an explanation of the ratings of Municipal Obligations by Moody's,
S&P and Fitch, see Appendix A. For a comparison of yields on such Municipal
Obligations and taxable securities, see the Taxable Equivalent Yield Tables in
Appendix B. For a general discussion of Municipal Obligations and the risks
associated with an investment therein, see Appendix A to the Statement of
Additional Information.
The maximum maturity of any debt security held for the New York Tax-Free Bond
Fund is 35 years.
Although higher quality Municipal Obligations may produce lower yields, they
generally are easier to sell or trade than lower quality Municipal Obligations.
To protect the value of its shareholders' investment under adverse market
conditions, the Adviser from time to time may deem it prudent to purchase higher
quality Municipal Obligations or taxable obligations for the New York Tax-Free
Bond Fund, with a resultant decrease in yield or increase in the proportion of
taxable income.
The net asset value of the New York Tax-Free Bond Fund's shares changes as
interest rates fluctuate. When interest rates decline, the value of the New York
Tax-Free Bond Fund's portfolio can be expected to rise. Conversely, when
interest rates rise, the value of the Fund's portfolio can be expected to
decline. Such changes in the value of the New York Tax-Free Bond Fund's
portfolio are reflected in the net asset value of shares of the New York
Tax-Free Bond Fund but do not affect the income received by the Fund from its
portfolio securities. Municipal Obligations with longer maturities, such as
those in which the New York Tax-Free Bond Fund is invested, generally produce
higher yields and are subject to greater market fluctuation as a result of
changes in interest rates than such securities with shorter maturities.
Dividends distributed to shareholders rise or fall in direct relation to the New
York Tax-Free Bond Fund's net income. Since available yields vary, no specific
level of income can be assured.
As a non-diversified investment company, the Trust is not subject to any
statutory restriction under the 1940 Act with respect to limiting the investment
of the New York Tax-Free Bond Fund's assets in one or relatively few issuers.
Since the Adviser may invest a relatively high percentage of the New York
Tax-Free Bond Fund's assets in the obligations of a limited number of issuers,
the value of shares of the Fund may be more susceptible to any single economic,
political or regulatory occurrence than the value of shares of a diversified
investment company would be.
The Adviser may invest the assets of the New York Tax-Free Bond Fund in a
relatively high percentage of Municipal Obligations to be paid from revenue
streams of similar types of projects. This may make the New York Tax-Free Bond
Fund more susceptible to any single economic, political or regulatory
occurrence, particularly since most or all such issuers would likely be located
in New York State. As the similarity in issuers increases, the potential for
fluctuation of the net asset value of the New York Tax-Free Bond Fund's shares
also increases. The Adviser may invest more than 25% of the assets of the New
York Tax-Free Bond Fund in industrial revenue bonds (i.e., bonds issued by
various state and local agencies to finance various industrial projects).
Certain investors in the New York Tax-Free Bond Fund may be required to pay a
federal alternative minimum tax on Fund dividends attributable to interest on
certain industrial revenue bonds. The Adviser also may invest more than 25% of
the assets of the Fund in revenue bonds issued for housing, electric utilities
and hospitals (subject to the restriction that it may not invest more than 25%
of the Fund's assets in any one such industry) at times when the relative value
of issues of such a type is considered by the Adviser to be more favorable than
that of other available types of issues. Therefore, investors should also be
aware of the risks which these investments may entail.
Housing revenue bonds typically are issued by a state, county or local housing
authority and are secured only by the revenues of mortgages originated by the
authority using the proceeds of the bond issue. Because of the impossibility of
precisely predicting demand for mortgages from the proceeds of such an issue,
there is a risk that the proceeds of the issue will be in excess of demand,
which would result in early retirement of the bonds by the issuer. Moreover,
such housing revenue bonds depend for their repayment upon the cash flow from
the underlying mortgages, which cannot be precisely predicted when the bonds are
issued. Any difference in the actual cash flow from such mortgages from the
assumed cash flow could have an adverse impact upon the ability of the issuer to
make scheduled payments of principal and interest on the bonds, or could result
in early retirement of the bonds. Additionally, such bonds depend in part for
scheduled payments of principal and interest upon reserve funds established from
the proceeds of the bonds, assuming certain rates of return on investment of
such reserve funds. If the assumed rates of return are not realized because of
changes in interest rate levels or for other reasons, the actual cash flow for
scheduled payments of principal and interest on the bonds may be adversely
affected.
Electric utilities face problems in financing large and lengthy construction
programs, such as cost increases and delay occasioned by regulatory and
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining sufficient rate increases, the effect of energy
conservation and difficulty of the capital markets to absorb utility debt.
Hospital bond ratings are often based on feasibility studies containing
projections of expenses, revenues and occupancy levels. A hospital's gross
receipts and net income available to service its debt are influenced by demand
for hospital services, the ability of the hospital to provide the services
required, management capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
competition, availability and expense of malpractice insurance, Medicaid and
Medicare funding levels, possible federal or state legislation limiting the
rates of increase of hospital charges, and weakened state finances which limit
and/or delay aid payments.
EQUITY FUND. The Equity Fund will normally invest at least 65% of its total
assets in equity securities of seasoned companies in sound financial condition
with large or intermediate capitalization which are expected to show
above-average price appreciation. The Equity Fund may invest in a broad range of
equity securities, including common and preferred stocks, debt securities
convertible into or exchangeable for common stock and securities such as
warrants or rights that are convertible into common stock.
The Manager will allocate the Equity Fund's assets between Alliance and
Brinson ("the Equity Sub-Advisers"). While the Manager maintains complete
discretion regarding the allocation of the Equity Fund's assets, the Manager
anticipates that it typically will allocate the Fund's assets evenly between the
Equity Sub-Advisers, each of which pursues the Fund's investment objective in
the manner described below.
Alliance. Alliance seeks the Equity Fund's investment objective by pursuing a
"growth" style of investing in marketable equity securities, primarily of U.S.
companies. However, the Equity Fund may purchase foreign, as well as domestic,
equity securities. Alliance normally will invest substantially all of the Equity
Fund's assets allocated to it in common stocks which Alliance believes will
appreciate in value.
Alliance generally seeks to invest the Equity Fund's assets in financially
secure firms with established operating histories that are proven leaders in
their industry or market sector. Such companies may demonstrate characteristics
such as participation in expanding markets, increasing unit sales volume, growth
in revenues and earnings per share, and increasing return on investments.
However, Alliance may invest the Equity Fund's assets in companies that do not
demonstrate such characteristics if it expects such companies to undergo an
acceleration in growth of earnings because of special factors such as new
management, new products, changes in consumer demand or basic changes in the
economic environment.
Alliance analyses each company considered for investment, using internal
fundamental research analysts, to determine its source of earnings, competitive
edge, management strength, and level of industry dominance as measured by market
share. At the same time, Alliance conducts an analysis of the financial
condition of each company and selects those prospects that demonstrate the
greatest potential for above-average capital appreciation and growth in
earnings. Alliance's philosophy is to seek the best available combination of
relative earnings growth and attractive valuation.
Brinson. Brinson seeks the Equity Fund's investment objective by pursuing a
"value" style of investment management. Brinson's approach to investing for the
Equity Fund is to invest in the equity securities of U.S. companies believed to
be undervalued based upon internal research and proprietary valuation systems.
Investment decisions are based on fundamental research, internally developed
valuation systems and seasoned judgment. Brinson's research focuses on several
levels of analysis, first, on understanding wealth shifts that occur within the
equity market, and second, on individual company research. At the company level,
Brinson quantifies expectations of a company's ability to generate profit and to
grow business into the future.
For each stock under analysis, Brinson discounts to the present all of the
future cash flows that it believes will accrue to the Equity Fund from the
investment in order to calculate a present or intrinsic value. This value
estimate generated by Brinson's proprietary valuation model is compared to
observed market price and ranked against other stocks accordingly. The rankings,
in combination with Brinson's investment judgment, determine which securities
are included in the portfolio.
Brinson monitors and assesses the degree to which the portfolio becomes
concentrated in industry or common types of stocks, and adjusts the portfolio to
balance the price/value opportunities with their concentrations. Brinson imposes
limits on the degree of concentration, as the Equity Fund does not intend to
concentrate its investments in a particular industry.
General. The Equity Fund also may (a) invest in options on securities,
securities indices or foreign currencies, (b) invest in futures contracts and
options on futures contracts, (c) enter into forward foreign currency exchange
contracts, (d) invest up to 10% of its net assets (at the time of investment) in
debt and equity securities which are traded in developed foreign countries, and
(e) invest up to 35% in bonds and other debt securities, including lower rated,
high-yield bonds, commonly referred to as "junk bonds." The Equity Fund does not
intend to write covered call options with respect to securities with an
aggregate market value of more than 10% of its total assets at the time an
option is written. The Equity Fund will not invest more than 5% of its net
assets (at the time of investment) in lower rated (BB/Ba or lower), high-yield
bonds. The Equity Fund may retain any bond whose rating drops below investment
grade if its is in the best interest of the Fund's shareholders. Securities
rated BB/Ba by a nationally recognized statistical rating organization are
considered to have speculative characteristics.
The Equity Fund may lend its portfolio securities. These loans may not exceed
30% of the value of the Fund's total assets.
The Equity Fund will not purchase securities for trading purposes. Pending
investment in equity and debt and also for temporary defensive purposes, the
Fund may invest without limit in short-term debt and other high-quality,
fixed-income securities and cash equivalents, which may include, but are not
limited to: (i) short-term obligations of the U.S. and foreign sovereign
governments and their agencies and instrumentalities, (ii) interest bearing
savings deposits, certificates of deposit and bankers' acceptances of U.S. and
foreign banks, (iii) high-quality rated commercial paper of U.S. or foreign
issuers, and (iv) repurchase agreements related to the foregoing. The Equity
Fund may invest up to 15% of its net assets in illiquid securities.
INTERNATIONAL EQUITY FUND. The investment characteristics of the International
Equity Fund correspond to those of the International Equity Fund. The
International Equity Portfolio will normally invest at least 80% of its total
assets in equity securities of foreign corporations, consisting of common
stocks, and other securities with equity characteristics, including preferred
stock, warrants, rights, securities convertible into common stock ("convertible
securities"), trust certificates, limited partnership interests and equity
participations. The common stock in which the International Equity Portfolio may
invest includes the common stock of any class or series or any similar equity
interest, such as trust or limited partnership interests. These equity
investments may or may not pay dividends and may or may not carry voting rights.
The principal investments of the International Equity Portfolio will be in
equity securities of companies organized and domiciled in developed nations
outside the United States or for which the principal trading market is outside
the United States, including Europe, Canada, Australia and the Far East,
although the Portfolio may invest up to 20% of its assets in equity securities
of companies in emerging markets. See "Additional Risk Factors and Policies --
Foreign Securities -- Emerging Markets." The International Equity Portfolio
intends to have at least three different countries represented in its portfolio.
It is the current intention of the International Equity Portfolio to invest
primarily in companies with large market capitalizations. The International
Equity Portfolio seeks to outperform the Morgan Stanley Capital International
EAFE (Europe, Australasia and Far East) Index, a capitalization-weighted index
containing approximately 1,100 equity securities of companies located outside
the United States. The International Equity Portfolio invests in securities
listed on foreign or domestic securities exchanges and securities traded in
foreign or domestic over-the-counter markets, and may invest in certain
restricted or unlisted securities.
Under exceptional conditions abroad or when, in the opinion of CGTC (the
"International Equity Sub-Adviser"), economic or market conditions warrant, the
International Equity Portfolio may temporarily invest part or all of its assets
in fixed income securities denominated in foreign currencies, obligations of
domestic or foreign governments and their political subdivisions ("Government
Securities"), and nonconvertible preferred stock, or hold its assets in cash or
equivalents. Debt securities purchased by the International Equity Portfolio
will be limited to those rated, at the time of investment, in the four highest
rating categories by a nationally recognized statistical rating organization
("NRSRO") or, if unrated, determined by the International Equity Sub-Adviser to
be of comparable quality. Securities rated by a NRSRO in the fourth highest
rating category are considered to have some speculative characteristics. When
the total return opportunities in a foreign bond market appear attractive in
local currency terms, but, in the International Equity Sub-Adviser's judgment,
unacceptable currency risk exists, currency futures, forwards and options may be
used to hedge the currency risk. See "Additional Risk Factors and Policies:
Forward Foreign Currency Contracts and Options on Foreign Currencies."
As described under "Management of the Trust, Advisor Trust and the Portfolio
Trust -- Sub-Advisers," CGTC, the International Equity Portfolio's Sub-Adviser,
uses a system of multiple portfolio managers pursuant to which the Portfolio is
divided into segments which are assigned to individual portfolio managers.
Within investment guidelines, each portfolio manager makes individual decisions
as to company, country, industry, timing and percentage based on extensive field
research and direct company contact.
Because of the risks associated with common stocks and other equity
investments, the International Equity Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors with a means of
speculating on short-term stock market movements. The International Equity
Sub-Adviser seeks to reduce these risks by diversifying the portfolio as well as
by monitoring broad economic trends and corporate and legislative developments.
SMALL CAP EQUITY FUND. The investment characteristics of the Small Cap Equity
Fund correspond to those of the Small Cap Equity Portfolio. The Small Cap Equity
Portfolio seeks to achieve its objective by investing, under normal market
conditions, at least 80% of its assets in equity securities (consisting of
common stocks, preferred stocks, and preference stocks; securities such as
bonds, warrants or rights that are convertible into stocks; and depositary
receipts for those securities) of Emerging Growth Companies. Emerging Growth
Companies generally would have small (under $1 billion) market capitalizations
and would have annual gross revenues ranging from $10 million to $1 billion,
would be expected to show earnings growth over time that is well above the
growth rate of the overall economy and the rate of inflation, and would have the
products, management and market opportunities which are usually necessary to
become more widely recognized. However, the Small Cap Equity Portfolio may also
invest in more established companies whose rates of earnings growth are expected
to accelerate because of special factors, such as rejuvenated management, new
products, changes in consumer demand or basic changes in the economic
environment. The Small Cap Equity Portfolio may invest up to 20% (and generally
expects to invest between 5% and 10%) of its assets in foreign securities
(excluding ADRs) (see "Additional Risk Factors and Policies -- Foreign
Securities" below).
Although the Small Cap Equity Portfolio will invest primarily in common
stocks, the Portfolio may, to a limited extent, seek appreciation in other types
of securities such as foreign or convertible securities and warrants when
relative values make such purchases appear attractive either as individual
issues or as types of securities in certain economic environments.
In addition to the above the Small Cap Equity Portfolio may engage in certain
investment techniques as described below under the caption "Additional Risk
Factors and Policies". The Small Cap Equity Portfolio's investments are subject
to certain risks, as described in the above-referenced sections of this
Prospectus and the Statement of Additional Information and as described below
under the caption "Additional Risk Factors and Policies".
When MIA (the "Small Cap Equity Sub-Adviser") believes that investing for
temporary defensive reasons is appropriate, such as during times of
international, political or economic uncertainty or turmoil, or in order to meet
anticipated redemption requests, part or all of the Small Cap Equity Portfolio's
assets may be invested in cash (including foreign currency) or cash equivalent
short-term obligations including, but not limited to, certificates of deposit,
commercial paper, short-term notes and U.S. Government Securities that the Small
Cap Equity Portfolio may invest in includes Government securities: (1) U.S.
Treasury obligations, which differ only in their interest rates, maturities and
times of issuance, including: U.S. Treasury bills (maturities of one year or
less); U.S. Treasury notes (maturities of one to ten years); and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which are backed
by the full faith and credit of the U.S. Government; and (2) obligations issued
or guaranteed by U.S. Government agencies, authorities or instrumentalities,
some of which are backed by the full faith and credit of the U.S. Treasury,
e.g., direct pass-through certificates of the Government National Mortgage
Association; some of which are supported by the right of the issuer to borrow
from the U.S. Government, e.g., obligations of Federal Home Loan Banks; and some
of which are backed only by the credit of the issuer itself, e.g., obligations
of the Student Loan Marketing Association.
ADDITIONAL RISK FACTORS AND POLICIES
DERIVATIVES
The Fixed Income Portfolio and International Equity Portfolio may invest in
various instruments that are commonly known as derivatives. Generally, a
derivative is a financial arrangement the value of which is based on, or
"derived" from, a traditional security, asset, or market index. A mutual fund,
of course, derives its value from the value of the investments it holds and so
might even be called a "derivative." Some "derivatives" such as mortgage-related
and other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of risks
associated with those uses. Futures and options are commonly used for
traditional hedging purposes to attempt to protect a fund from exposure to
changing interest rates, securities prices, or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities. The
Fixed Income and International Equity Portfolios may use derivatives for hedging
purposes, cash management purposes, as a substitute for investing directly in
fixed income instruments, and to enhance return when their Sub-Advisers believe
the investment will assist the Portfolios in achieving their investment
objectives. A description of the derivatives that the Fixed Income and
International Equity Portfolios may use and some of their associated risks
follows.
OPTIONS AND FUTURES TRANSACTIONS
The Fixed Income Portfolio, Small Cap Equity Portfolio and Equity Fund may
invest in financial futures contracts, options on futures contracts and options
on securities (collectively, "futures and options"). In addition, the Fixed
Income Portfolio, International Equity Portfolio, Small Cap Equity Portfolio and
Equity Fund may invest in foreign currency futures contracts and options on
foreign currencies and foreign currency futures. The International Equity
Portfolio may only do so for hedging purposes. The Small Cap Equity Portfolio
may also enter into contracts based on indexes of securities and write covered
call and put options and purchase call and put options on domestic or foreign
stock indices. The New York Tax-Free Bond Fund may enter into transactions in
futures contracts on any fixed income securities and indexes of municipal
securities. The New York Tax-Free Bond Fund may only do so for hedging purposes
and not for speculation. Futures contracts provide for the sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and price. An option is a legal contract that gives the
holder the right to buy or sell a specified amount of the underlying security,
currency or futures contract at a fixed or determinable price upon the exercise
of the option. A call option conveys the right to buy and a put option conveys
the right to sell a specified quantity of the underlying instrument.
The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase the return of the Portfolios and the Funds. While the use of these
instruments by the Portfolios and the Funds may reduce certain risks associated
with owning its portfolio securities, these techniques themselves entail certain
other risks. If the Sub-Advisers apply a strategy at an inappropriate time or
judge market conditions or trends incorrectly, options and futures strategies
may lower a Portfolio's or Fund's return. Certain strategies limit the potential
of the Portfolios or the Funds to realize gains as well as limit its exposure to
losses. The Portfolios and the Funds could also experience losses if the prices
of its options and futures positions were poorly correlated with its other
investments. There can be no assurance that a liquid market will exist at a time
when the Portfolios or Funds seek to close out a futures contract or a futures
option position. Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single day; once the
daily limit has been reached on a particular contract, no trades may be made
that day at a price beyond that limit. In addition, certain of these instruments
are relatively new and without a significant trading history. As a result, there
is no assurance that an active secondary market will develop or continue to
exist. Lack of a liquid market for any reason may prevent the Portfolios and the
Funds from liquidating an unfavorable position and the Portfolios or the Funds
would remain obligated to meet margin requirements until the position is closed.
In addition, the Portfolios or the Funds will incur transaction costs, including
trading commissions and options premiums, in connection with its futures and
options transactions, and these transactions could significantly increase a
Portfolio's or Fund's turnover rate.
The Fixed Income Portfolio will not enter into futures contracts or options
thereon to the extent that its outstanding obligations to purchase securities
under these contracts in combination with its outstanding obligations with
respect to options transactions would exceed 35% of its total assets. The Fixed
Income Portfolio will use financial futures contracts and related options only
for "bona fide hedging" purposes, as such term is defined in applicable
regulations of the Commodity Futures Trading Commission, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that assets committed to initial margin deposits on such instruments,
plus premiums paid for open futures options positions, less the amount by which
any such positions are "in-the-money," do not exceed 5% of the Fixed Income
Portfolio's net assets. The Portfolios and the Funds will segregate assets or
"cover" its positions consistent with requirements under the 1940 Act. The Fixed
Income Portfolio may also purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. The Small Cap Equity Portfolio may enter into
futures contracts for hedging purposes, in order to protect the Portfolio's
current or intended investments from the effects of changes in interest or
exchange rates and for non-hedging purposes, to the extent permitted by
applicable law. However, the Small Cap Equity Portfolio will not enter into any
futures contracts if immediately thereafter the value of securities and other
obligations underlying all such futures contracts would exceed 50% of the value
of its total assets. The Small Cap Equity Portfolio may also purchase and write
options on futures contracts for the purpose of protecting against declines in
the value of portfolio securities or against increases in the cost of securities
to be acquired, or for non-hedging purposes. The Small Cap Equity Portfolio may
write options on domestic or foreign stock indices for the purpose of increasing
its current income and/or to protect its portfolio against declines in the value
of securities it owns or increases in the value of securities to be acquired.
The Equity Fund may write covered call options (which are considered
derivatives) which are traded on a national securities exchange with respect to
securities in the portfolio in an attempt to increase its income and to provide
greater flexibility in the disposition of its portfolio securities. The Small
Cap Equity Portfolio may write covered put and call options on securities and
purchase put and call options on securities that are traded on foreign or U.S.
securities exchanges and over the counter. The Small Cap Equity Portfolio will
write options on securities for the purpose of increasing its return and/or
protecting the value of its portfolio. A "call option" is a contract sold for a
price (the "premium") giving its holder the right to buy a specific number of
shares of stock at a specific price prior to a specified date. A "covered call
option" is a call option issued on securities already owned by the writer of the
call option for delivery to the holder upon the exercise of the option. During
the period of the option, the option writer forgoes the opportunity to profit
from any increase in the market price of the underlying security above the
exercise price of the option (to the extent that the increase exceeds the net
premium). The Equity Fund also may enter into "closing purchase transactions" in
order to terminate its obligation to deliver the underlying security (this may
result in a short-term gain or loss). A closing purchase transaction is the
purchase of a call option (at a cost which may be more or less than the premium
received for writing the original call option) on the same security, with the
same exercise price and call period as the option previously written. If the
Equity Fund is unable to enter into a closing purchase transaction, it may be
required to hold a security that it might otherwise have sold to protect against
depreciation. The Equity Fund does not intend to write covered call options with
respect to securities with an aggregate market value of more than 10% of its
total assets at the time an option is written. This percentage limitation will
not be increased without prior disclosure in the current Prospectus.
The Small Cap Equity Portfolio may also write combinations of put and call
options on the same security, known as "straddles." Such transactions can
generate additional premium income but also present increased risk.
FORWARD FOREIGN CURRENCY CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Forward foreign currency exchange contracts ("forward contracts") are
intended to minimize the risk of loss to the Fixed Income, International Equity
and Small Cap Equity Portfolios and the Equity Fund from adverse changes in the
relationship between the U.S. dollar and foreign currencies. The Fixed Income
Portfolio and International Equity Portfolio may not enter into such contracts
for speculative purposes. The Fixed Income Portfolio has no specific limitation
on the percentage of assets it may commit to forward contracts, subject to its
stated investment objective and policies, except that the Portfolio will not
enter into a forward contract if the amount of assets set aside to cover the
contract would impede portfolio management. The Small Cap Equity Portfolio may
enter into such contracts for hedging purposes or for non-hedging purposes, to
the extent permitted by applicable law. By entering into transactions in Forward
Contracts, however, the Portfolios may be required to forego the benefits of
advantageous changes in exchange rates and, in the case of Forward Contracts
entered into for non-hedging purposes, the Portfolios may sustain losses which
will reduce its gross income. Forward Contracts are traded over-the-counter and
not on organized commodities or securities exchanges. As a result, such
contracts operate in a manner distinct from exchange-traded instruments and
their use involves certain risks beyond those associated with transactions in
Futures Contracts or options traded on exchanges.
A forward contract is an obligation to purchase or sell a specific currency
for an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A forward contract may
be used, for example, when the Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to "lock in"
the U.S. dollar price of the security.
The Fixed Income and International Equity Portfolios may also purchase and
write put and call options on foreign currencies for the purpose of protecting
against declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired.
The Small Cap Equity Portfolio may also enter into a Forward Contract on one
currency in order to hedge against risk of loss arising from fluctuations in the
value of a second currency (referred to as a "cross hedge") if, in the judgment
of the Small Cap Equity Sub-Adviser, a reasonable degree of correlation can be
expected between movements in the values of the two currencies.
The Fixed Income Portfolio may also combine forward contracts with investments
in securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign bond, the Fixed Income
Portfolio may purchase a U.S. dollar-denominated security and at the same time
enter into a forward contract to exchange U.S. dollars for the contract's
underlying currency at a future date. By matching the amount of U.S. dollars to
be exchanged with the anticipated value of the U.S. dollar-denominated security,
the Fixed Income Portfolio may be able to lock in the foreign currency value of
the security and adopt a synthetic investment position reflecting the credit
quality of the U.S.
dollar-denominated security.
There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in U.S. dollars or other foreign currency is
not exactly matched with the Fixed Income Portfolio's obligation under the
forward contract. On the date of maturity the Fixed Income Portfolio may be
exposed to some risk of loss from fluctuations in that currency. Although the
Fixed Income Sub-Adviser will attempt to hold such mismatching to a minimum,
there can be no assurance that the Sub-Adviser will be able to do so. When the
Fixed Income Portfolio enters into a forward contract for purposes of creating a
synthetic security, it will generally be required to hold high-grade, liquid
securities or cash in a segregated account with a daily value at least equal to
its obligation under the forward contract.
FOREIGN SECURITIES
The Equity Fund, Fixed Income Portfolio, International Equity Portfolio and
Small Cap Equity Portfolio may invest in foreign securities. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing, and financial reporting
requirements and standards of practice comparable to those applicable to
domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, other taxes imposed by the foreign
country on the Fund's earnings, assets, or transactions, limitation on the
removal of cash or other assets of the Portfolios, political or financial
instability, or diplomatic and other developments which could affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
Changes in foreign exchange rates will affect the value of securities
denominated or quoted in currencies other than the U.S. dollar. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Furthermore, dividends and
interest payments from foreign securities may be withheld at the source.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements, and
transaction costs of foreign currency conversions.
The Small Cap Equity Portfolio may invest in securities of foreign growth
companies, whose rates of earnings growth are expected to accelerate because of
special factors, such as rejuvenated management, new products, changes in
consumer demand, or basic changes in the economic environment or which otherwise
represent opportunities for long-term growth. The Small Cap Equity Portfolio may
also invest in securities of issuers located in countries with relatively low
gross national product per capita compared to the world's major economies, and
in countries or regions with the potential for rapid economic growth ("Emerging
Markets").
Emerging Markets. Investing in emerging market countries presents greater risk
than investing in foreign issuers in general. A number of emerging markets
restrict foreign investment in stocks. Repatriation of investment income,
capital, and the proceeds of sales by foreign investors may require governmental
registration and/or approval in some emerging market countries. A number of the
currencies of developing countries have experienced significant declines against
the U.S. dollar in recent years, and devaluation may occur subsequent to
investments in these currencies by the Portfolio. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Many of the emerging securities markets are relatively small, have
low trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is the risk that a future
economic or political crisis could lead to price controls, forced mergers of
companies, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which could have a detrimental effect
on the Portfolio's investments.
Investing in formerly communist East European countries involves the
additional risk that the government or other executive or legislative bodies may
decide not to continue to support the economic reform programs implemented since
the fall of communism and could follow radically different political and/or
economic policies to the detriment of investors, including non-market oriented
policies such as the support of certain industries at the expense of other
sectors or a return to a completely centrally planned economy. The International
Equity Portfolio does not currently intend to invest a significant portion of
its assets in formerly communist East European countries.
With respect to the International Equity Portfolio, "emerging markets" include
any country which in the opinion of the International Equity Sub-Adviser is
generally considered to be an emerging or developing country by the
International Bank for Reconstruction and Development (the World Bank) and the
International Monetary Fund. Currently, these countries generally include every
country in the world except Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland, United Kingdom and
United States. The International Equity Portfolio may invest up to 20% of its
assets in the equity securities of companies based in emerging markets.
With respect to the Small-Cap Equity Fund, Emerging Markets include any
country: (i) having an "emerging stock market" as defined by the International
Finance Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development (the "World Bank"); (iii)
listed in World Bank publications as developing; or (iv) determined by the
Adviser to be an emerging market as defined above. With respect to the
International Equity Portfolio, a company in an emerging market is one that: (i)
is domiciled and has its principal place of business in an emerging market or
(ii) (alone or on a consolidated basis) derives or expects to derive a
substantial portion of its total revenue from either goods produced, sales made
or services performed in emerging markets.
With respect to the Small Cap Equity Fund, the company's principal activities
are deemed to be located in a particular country if: (a) the company is
organized under the laws of, and maintains a principal office in that country;
(b) the company has its principal securities trading market in that country, (c)
the company derives 50% or more of its total revenues from goods sold or
services performed in that country; or (d) the company has 50% or more of its
assets in that country.
Sovereign and Supranational Debt Obligations. Debt instruments issued or
guaranteed by foreign governments, agencies, and supranational organizations
("sovereign debt obligations"), especially sovereign debt obligations of
developing countries, may involve a high degree of risk, and may be in default
or present the risk of default. The issuer of the obligation or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
prepay principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of principal
and interest may depend on political as well as economic factors.
DEPOSITARY RECEIPTS
The International Equity Portfolio may invest in American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and International Depositary Receipts ("IDRs"), or other similar
securities convertible into securities of foreign issuers. The Small Cap Equity
Portfolio may invest in ADRs. ADRs (sponsored or unsponsored) are receipts
typically issued by a U.S. bank or trust company evidencing the deposit with
such bank or company of a security of a foreign issuer, and are publicly traded
on exchanges or over-the-counter in the United States. In sponsored programs, an
issuer has made arrangements to have its securities trade in the form of ADRs.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program.
EDRs, which are sometimes referred to as Continental Depositary Receipts, are
receipts issued in Europe typically by foreign bank and trust companies that
evidence ownership of either foreign or domestic underlying securities. IDRs are
receipts typically issued by a European bank or trust company evidencing
ownership of the underlying foreign securities. GDRs are receipts issued by
either a U.S. or non-U.S. banking institution evidencing ownership of the
underlying foreign securities.
HIGH YIELD/HIGH RISK SECURITIES
Securities rated lower than Baa by Moody's or lower than BBB by S&P are
sometimes referred to as "high yield" or "junk" bonds. In addition, securities
rated Baa (Moody's) and BBB (S&P) are considered to have some speculative
characteristics.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
securities may be regarded as predominately speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality debt securities, and the ability of the Fixed
Income Portfolio to achieve its investment objective may, to the extent of its
investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fixed Income Portfolio
were investing in higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to interest
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If the issuer of high yield securities
defaults, the Fixed Income Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes and, therefore, tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fixed Income Portfolio. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Fixed Income Sub-Adviser does not rely solely on credit ratings when selecting
securities for the Fixed Income Portfolio, and develops its own independent
analysis of issuer credit quality. If a credit rating agency changes the rating
of a security held by the Fixed Income Portfolio, the Portfolio may retain the
security if the Fixed Income Sub-Adviser deems it in the best interest of
investors.
FIXED INCOME SECURITIES
To the extent a Fund or Portfolio invests in fixed income securities, the net
asset value of the Fund or Portfolio may change as the general levels of
interest rates fluctuate. When interest rates decline, the value of fixed income
securities can be expected to rise. Conversely, when interest rates rise, the
value of fixed income securities can be expected to decline. The Small Cap
Equity Portfolio has no restrictions with respect to the maturities or duration
of the fixed income securities it holds. A Fund's or Portfolio's investments in
fixed income securities with longer terms to maturity or greater duration are
subject to greater volatility than a Fund's or Portfolio's shorter-term
obligations. Fixed income securities in which the Small Cap Equity Portfolio may
invest include bonds (including zero coupon bonds, deferred interest bonds and
payable in-kind bonds), debentures, mortgage securities, notes, bills,
commercial paper, obligations issued or guaranteed by a government or any of its
political subdivisions, agencies or instrumentalities, and certificates of
deposit, as well as debt obligations which may have a call on common stock by
means of a conversion privilege or attached warrants.
ZERO COUPON OBLIGATIONS
The Fixed Income Portfolio may invest in zero coupon obligations, which are
fixed-income securities that do not make regular interest payments. Instead,
zero coupon obligations are sold at substantial discounts from their face value.
The Fixed Income Portfolio accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fixed Income Portfolio's distribution
obligations, in which case the Portfolio will forego the purchase of additional
income-producing assets with these funds. The difference between a zero coupon
obligation's issue or purchase price and its face value represents the imputed
interest an investor will earn if the obligation is held until maturity. Zero
coupon obligations may offer investors the opportunity to earn higher yields
that those available on ordinary interest-paying obligations of similar credit
quality and maturity. However, zero coupon obligation prices may also exhibit
greater price volatility than ordinary fixed-income securities because of the
manner in which their principal and interest are returned to the investor.
CONVERTIBLE SECURITIES
Although the Equity Fund's and International Equity Portfolio's equity
investments consist primarily of common and preferred stocks, the Fund and the
Portfolio may buy securities convertible into common stock if, for example, the
Sub-Advisers believe that a company's convertible securities are undervalued in
the market. Convertible securities eligible for purchase by the International
Equity Portfolio and the Equity Fund consist of convertible bonds, convertible
preferred stocks, warrants and rights. See "Additional Risk Factors and Policies
- -- Warrants" below and the Statement of Additional Information for a discussion
of these instruments.
WARRANTS
The International Equity Portfolio and the Equity Fund each may invest up to
10% of their net assets in warrants, except that this limitation does not apply
to warrants acquired in units or attached to securities. A warrant is an
instrument issued by a corporation which gives the holder the right to subscribe
to a specific amount of the corporation's capital stock at a set price for a
specified period of time. Warrants do not represent ownership of the securities,
but only the right to buy the securities. The prices of warrants do not
necessarily move parallel to the prices of underlying securities. Warrants may
be considered speculative in that they have no voting rights, pay no dividends,
and have no rights with respect to the assets of a corporation issuing them.
With respect to the International Equity Portfolio, warrant positions will not
be used to increase the leverage of the Portfolio. Consequently, warrant
positions are generally accompanied by cash positions equivalent to the required
exercise amount.
MORTGAGE-RELATED SECURITIES
Mortgage-Backed Securities. The Fixed Income Portfolio may invest in
mortgage-backed certificates and other securities representing ownership
interests in mortgage pools, including CMOs. Interest and principal payments on
the mortgages underlying mortgage-backed securities are passed through to the
holders of the mortgage-backed securities. Mortgage-backed securities currently
offer yields higher than those available from many other types of fixed-income
securities, but because of their prepayment aspects, their price volatility and
yield characteristics will change based on changes in prepayment rates.
Generally, prepayment rates increase if interest rates fall and decrease if
interest rates rise. For many types of mortgage-backed securities, this can
result in unfavorable changes in price and yield characteristics in response to
changes in interest rates and other market conditions. For example, as a result
of their prepayment aspects, the Fixed Income Portfolio's mortgage-backed
securities may have less potential for capital appreciation during periods of
declining interest rates than other fixed income securities of comparable
maturities, although such obligations may have a comparable risk of decline in
market value during periods of rising interest rates.
Mortgage-backed securities have yield and maturity characteristics that are
dependent on the mortgages underlying them. Thus, unlike traditional debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on these securities include both
interest and a partial payment of principal. In addition to scheduled loan
amortization, payments of principal may result from the voluntary prepayment,
refinancing or foreclosure of the underlying mortgage loans. Such prepayments
may significantly shorten the effective durations of mortgage-backed securities,
especially during periods of declining interest rates. Similarly, during periods
of rising interest rates, a reduction in the rate of prepayments may
significantly lengthen the effective durations of such securities.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the risk that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise prepayment options at the time when it is least advantageous
to investors, generally prepaying mortgages as interest rates fall, and slowing
payments as interest rates rise. Besides the effect of prevailing interest
rates, the rate of prepayment and refinancing of mortgages may also be affected
by home value appreciation, ease of the refinancing process and local economic
conditions.
Market risk reflects the risk that the price of the security may fluctuate
over time. The price of mortgage-backed securities may be particularly sensitive
to prevailing interest rates, the length of time the security is expected to be
outstanding, and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of mortgage-backed
securities, and a fund invested in such securities wishing to sell them may find
it difficult to find a buyer, which may in turn decrease the price at which they
may be sold.
Credit risk reflects the risk that the Fixed Income Portfolio may not receive
all or part of its principal because the issuer or credit enhancer has defaulted
on its obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
For further information, see the Statement of Additional Information.
Stripped Mortgage-Backed Securities. The Fixed Income Portfolio may invest in
Stripped Mortgage-Backed Securities ("SMBS") which are derivative multi-class
mortgage securities. SMBS may be issued by agencies or instrumentalities of the
U.S. Government and private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose entities of the foregoing. The Fixed Income
Portfolio's investments in SMBS will be limited to 10% of net assets.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest (the interest-only or IO class),
while the other class will receive all of the principal (the principal-only or
PO class). The cash flows and yields on IO and PO classes can be extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the yield to maturity
of IOs or POs, respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor may fail to
recoup fully its initial investment in an IO class of a stripped mortgage-backed
security. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the yield on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to the Fixed Income Portfolio's limitations on investment
in illiquid securities. For further information on these securities, see the
Statement of Additional Information.
Other Asset-Backed Securities. The Fixed Income Portfolio may invest in
securities representing interests in other types of financial assets, such as
credit card receivables, automobile loan and lease receivables, aircraft lease
receivables, home equity loan receivables, manufactured housing receivables,
equipment loan and lease receivables, and student loan receivables. Such
securities are subject to many of the same risks as are mortgage-backed
securities, including prepayment risks and risks of foreclosure. They may or may
not be secured by the receivables themselves or may be unsecured obligations of
their issuers. For further information on these securities, see the Statement of
Additional Information.
EURODOLLAR AND YANKEE BANK OBLIGATIONS
The Fixed Income Portfolio may invest in Eurodollar bank obligations and
Yankee bank obligations. Eurodollar bank obligations are dollar-denominated
certificates of deposit and time deposits issued outside the U.S. capital
markets by foreign branches of U.S. banks and by foreign banks. Yankee bank
obligations are dollar-denominated obligations issued in the U.S. capital
markets by foreign banks. Eurodollar and Yankee obligations are subject to the
same risks that pertain to domestic issues, notably credit risk, market risk and
liquidity risk. Additionally, Eurodollar (and to a limited extent Yankee bank)
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from freely flowing across its borders. Other risks include: adverse
political and economic developments, the extent and quality of government
regulation of financial markets and institutions, the imposition of foreign
withholding taxes, and the expropriation or nationalization of foreign issuers.
REPURCHASE AGREEMENTS
The Fixed Income Portfolio, New York Tax-Free Bond Fund, Equity Fund,
International Equity Portfolio and Small Cap Equity Portfolio may invest in
repurchase agreements. The Fixed Income Portfolio may invest in repurchase
agreements collateralized by U.S. Government securities, certificates of deposit
and certain bankers' acceptances. With respect to the New York Tax-Free Bond
Fund, Equity Fund and International Equity Portfolio, the Adviser is authorized
to enter into repurchase agreements on behalf of the Fund only with member banks
of the Federal Reserve System or "primary dealers" (as designated by the Federal
Reserve Bank of New York). The Equity Fund may also enter into repurchase
agreements with sellers who are member firms (or a subsidiary thereof) of the
New York Stock Exchange, recognized domestic or foreign securities dealers or
institutions which an Equity Sub-Adviser has determined to be of comparable
creditworthiness. The Small Cap Equity Portfolio may enter into repurchase
agreements in order to earn income or available cash or as a temporary defensive
measure. Repurchase agreements are transactions by which a Portfolio or Fund
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The Advisor or
Sub-Advisers will continually monitor the value of the underlying securities to
ensure that their value, including accrued interest, always equals or exceeds
the repurchase price. Repurchase agreements are considered to be loans
collateralized by the underlying security under the 1940 Act, and therefore will
be fully collateralized.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, the
Portfolios or Fund may incur a loss upon disposition of them. If the seller of
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a bankruptcy court may determine that
the underlying securities are collateral not within the control of the Portfolio
and therefore subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolios or Fund may not be able to substantiate its
interest in the underlying securities. While the managements of the Trust and
the Portfolio Trust acknowledge these risks, it is expected that they can be
controlled through stringent security selection criteria and careful monitoring
procedures. As discussed in the Statements of Additional Information, the Fixed
Income, International Equity and Small Cap Equity Portfolios and the New York
Tax-Free Bond and Equity Funds have adopted certain procedures to minimize the
risks of investing in repurchase agreements.
ILLIQUID INVESTMENTS
The New York Tax-Free Bond Fund, Equity Fund, Fixed Income Portfolio,
International Equity Portfolio and Small Cap Equity Portfolio may invest up to
15% of their net assets in securities that are illiquid by virtue of the absence
of a readily available market, or because of legal or contractual restrictions
on resale. This policy does not limit the acquisition of securities eligible for
resale to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933 or, in the case of the Fixed Income Portfolio only,
commercial paper issued pursuant to Section 4(2) under the Securities Act of
1933 that are determined to be liquid in accordance with guidelines established
by the Portfolio Trust's Board of Trustees. There may be delays in selling these
securities and sales may be made at less favorable prices. The New York Tax-Free
Bond Fund and International Equity Portfolio have separate policies that no more
than 10% of their net assets may be invested in securities which are restricted
as to resale, including Rule 144A and Section 4(2) securities. The Fixed Income
Portfolio has a policy that no more than 25% of its net assets may be invested
in securities which are restricted as to resale, including Rule 144A and Section
4(2) securities.
Each Sub-Adviser may determine that a particular Rule 144A security is liquid
and thus not subject to the Fixed Income Portfolio's, International Equity
Portfolio's, Small Cap Equity Portfolio's or Equity Fund's limits on investment
in illiquid securities, pursuant to guidelines adopted by the Board of Trustees.
Factors that a Sub-Adviser must consider in determining whether a particular
Rule 144A security is liquid include the frequency of trades and quotes for the
security, the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, dealer undertakings to make a market in
the security, and the nature of the security and the nature of the market for
the security (i.e., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). Investing in Rule 144A
securities could have the effect of increasing the level of a Portfolio's or
Fund's illiquidity to the extent that qualified institutions might become, for a
time, uninterested in purchasing these securities.
BRADY BONDS
A portion of the Fixed Income Portfolio's assets may be invested in certain
debt obligations customarily referred to as Brady Bonds, which are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former Treasury Secretary Nicholas F. Brady (the "Brady Plan"). Brady Bonds have
been issued only recently and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are dollar-denominated) and are actively traded in the
over-the-counter secondary market. Brady Bonds have been issued by the
governments of Argentina, Costa Rica, Mexico, Nigeria, Uruguay, Venezuela,
Brazil and the Philippines, as well as other emerging markets countries. Most
Brady Bonds are currently rated below BBB by S&P or Baa by Moody's. In light of
the risk characteristics of Brady Bonds (including uncollateralized repayment of
principal at maturity for some instruments) and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds should be
viewed as speculative. For further information on these securities, see the
Statement of Additional Information.
FLOATING AND VARIABLE RATE OBLIGATIONS
Certain obligations that the Fixed Income Portfolio may purchase may have a
floating or variable rate of interest, i.e., the rate of interest varies with
changes in specified market rates or indices, such as the prime rates, and at
specified intervals. Certain floating or variable rate obligations that may be
purchased by the Portfolio may carry a demand feature that would permit the
holder to tender them back to the issuer of the underlying instrument, or to a
third party, at par value prior to maturity. The demand features of certain
floating or variable rate obligations may permit the holder to tender the
obligations to foreign banks, in which case the ability to receive payment under
the demand feature will be subject to certain risks, as described under "Foreign
Securities," above.
VARIABLE RATE INSTRUMENTS
Variable rate instruments that the Adviser may purchase on behalf of the New
York Tax-Free Bond Fund provide for a periodic adjustment in the interest rate
paid on the instrument and permit the holder to receive payment upon a specified
number of days' notice of the unpaid principal balance plus accrued interest
either from the issuer or by drawing on a bank letter of credit, a guarantee or
an insurance policy issued with respect to such instrument or by tendering or
"putting" such instrument to a third party.
Because of the variable rate nature of the instruments, during periods when
prevailing interest rates decline, the New York Tax-Free Bond Fund's yield will
decline and its shareholders will forgo the opportunity for capital
appreciation. On the other hand, during periods when prevailing interest rates
increase, the New York Tax-Free Bond Fund's yield will increase and its
shareholders will have reduced risk of capital depreciation. In certain cases,
the interest rate index on which an instrument's yield is based may not rise and
fall to the same extent or as quickly as the general market for Municipal
Obligations. These instruments are considered derivitives and the value of such
instruments may be more volatile than other floating rate Municipal Obligations.
For additional information concerning variable rate instruments, see
"Investment Objective, Policies and Restrictions -- Variable Rate Instruments"
in the Statement of Additional Information.
INVERSE FLOATING RATE OBLIGATIONS
The Fixed Income Portfolio may invest in inverse floating rate obligations
("inverse floaters"). Inverse floaters have coupon rates that vary inversely at
a multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate. In addition, like most other fixed-income securities, the value
of inverse floaters will generally decrease as interest rates increase. Inverse
floaters may exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
mortgage assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS As a temporary
defensive measure, the Fixed Income Portfolio may invest in
certificates of deposit, time deposits, bankers' acceptances, and other
short-term debt obligations issued by commercial banks and savings and loan
associations ("S&Ls"). Certificates of deposit are receipts from a bank or S&L
for funds deposited for a specified period of time at a specified rate of
return. Time deposits in banks or S&Ls are generally similar to certificates of
deposit but are uncertificated. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
commercial transactions. The Fixed Income Portfolio may not invest in time
deposits maturing in more than seven days. The Portfolio will limit its
investment in time deposits maturing from two business days through seven
calendar days to 15% of its total assets.
The Fixed Income Portfolio will not invest in any obligation of a commercial
bank unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies or, in the case of domestic banks which do not
have total assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal amount of such investment
is insured in full by the Federal Deposit Insurance Corporation (the "FDIC"),
(ii) in the case of U.S. banks, it is a member of the FDIC and (iii) in the case
of foreign branches of U.S. banks, the security is deemed by the Fixed Income
Sub-Adviser to be of an investment quality comparable with other debt securities
which may be purchased by the Fixed Income Portfolio.
The Fixed Income Portfolio may also invest in obligations of U.S. banks,
foreign branches of U.S. banks (Eurodollars) and U.S. branches of foreign banks
(Yankee dollars) as a temporary defensive measure. Euro and Yankee dollar
investments will involve some of the same risks as investing in foreign
securities, as described above and in the Statement of Additional Information.
LOANS OF PORTFOLIO SECURITIES
The International Equity and Small Cap Equity Portfolios and the Equity Fund
may lend securities to qualified brokers, dealers, banks and other financial
institutions for the purpose of realizing additional income. Loans of securities
will be collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned securities. In addition,
the International Equity and Small Cap Equity Portfolios will not lend their
portfolio securities to the extent that greater than one-third of each
Portfolios total assets, at fair market value, would be committed to loans at
that time. The Equity Fund will not lend its portfolio securities to the extent
that greater than 30% of its total assets, at fair market value, would be
committed to loans at that time.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES AND MUNICIPAL OBLIGATIONS
The Fixed Income Portfolio and International Equity Portfolio may purchase and
sell securities on a when-issued or firm-commitment basis, in which a security's
price and yield are fixed on the date of the commitment but payment and delivery
are scheduled for a future date. On the settlement date, the market value of the
security may be higher or lower than its purchase or sale price under the
agreement. If the other party to a when-issued or firm-commitment transaction
fails to deliver or pay for the security, the Fixed Income Portfolio and
International Equity Portfolio could miss a favorable price or yield opportunity
or suffer a loss. The Portfolios will not earn interest on securities until the
settlement date. The Fixed Income Portfolio and International Equity Portfolio
will maintain in a segregated account with the custodian cash or liquid
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the securities on a when-issued basis.
New issues of Municipal Obligations may be offered on a "when-issued" or
"forward delivery" basis. The payment obligation and the interest rate that will
be received on the Municipal Obligations offered on this basis are each fixed at
the time the Trust commits to the purchase for the New York Tax-Free Bond Fund,
although settlement, i.e., delivery of and payment for the Municipal
Obligations, takes place beyond customary settlement time (but normally within
45 days of the commitment). Between the time the Trust commits to purchase the
"when-issued" or "forward delivery" Municipal Obligation for the New York
Tax-Free Bond Fund and the time delivery and payment are made, the "when-issued"
or "forward delivery" Municipal Obligation is treated as an asset of the Fund
and the amount which the Fund is committed to pay for that Municipal Obligation
is treated as a liability of the Fund. No interest on a "when-issued" or
"forward delivery" Municipal Obligation is accrued for the New York Tax-Free
Bond Fund until delivery occurs. Although the Trust only makes commitments to
purchase "when-issued" or "forward delivery" Municipal Obligations for the New
York Tax-Free Bond Fund with the intention of actually acquiring them, the Trust
may sell these obligations before the settlement date if deemed advisable by the
Adviser. Purchasing Municipal Obligations on a "when-issued" or "forward
delivery" basis can involve a risk that the yields available in the market on
the settlement date may actually be higher (or lower) than those obtained in the
transaction itself and, as a result, the "when-issued" or "forward delivery"
Municipal Obligation may have a lesser (or greater) value at the time of
settlement than the New York Tax-Free Bond Fund's payment obligation with
respect to that Municipal Obligation. Furthermore, if the Trust sells the
"when-issued" or "forward delivery" Municipal Obligation before the settlement
date or if the Trust sells other obligations from the New York Tax-Free Bond
Fund's portfolio in order to meet the payment obligations, the Fund may realize
a capital gain, which is not exempt from federal, New York State or New York
City income taxation.
For additional information concerning "when-issued" or "forward delivery"
Municipal Obligations, see "Investment Objective, Policies and Restrictions --
"When-Issued" Municipal Obligations" in the Statement of Additional Information.
SWAPS, CAPS, FLOORS AND COLLARS
The Fixed Income Portfolio may enter into swap contracts and other similar
instruments in accordance with its policies. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The payment streams are calculated by reference to a specified index
and agreed upon notional amount. The term specified index includes currencies,
fixed interest rates, prices and total return on interest rate indices,
fixed-income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, the Fixed
Income Portfolio may agree to swap the return generated by a fixed-income index
for the return generated by a second fixed-income index. The currency swaps in
which the Fixed Income Portfolio may enter will generally involve an agreement
to pay interest streams calculated by reference to interest income linked to a
specified index in one currency in exchange for a specified index in another
currency. Such swaps may involve initial and final exchanges that correspond to
the agreed upon notional amount.
The swaps in which the Fixed Income Portfolio may engage also include rate
caps, floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium) and the other party pays periodic amounts based on the
movement of a specified index.
The Fixed Income Portfolio will usually enter into swaps on a net basis, i.e.,
the two return streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two returns. The Fixed Income
Portfolio's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Portfolio) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or high-grade
debt obligations, to avoid any potential leveraging. The Fixed Income Portfolio
will not enter into any swap agreement unless the unsecured commercial paper,
senior debt or the claims-paying ability of the counterparty is rated AA or A-1
or better by S&P or Aa or P-1 or better by Moody's, rated comparably by another
NRSRO or determined by the Sub-Adviser to be of comparable quality.
Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fixed Income Portfolio is contractually obligated to make. If the other party to
an interest rate swap defaults, the Fixed Income Portfolio's risk of loss
consists of the net amount of interest payments that the Portfolio is
contractually entitled to receive. In contrast, currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. If there is a default by
the counterparty, the Fixed Income Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in its forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Fixed Income Portfolio would be less favorable than it would
have been if this investment technique were not used.
RISK FACTORS AFFECTING INVESTMENTS IN NEW YORK MUNICIPAL OBLIGATIONS
The Adviser intends to invest a high proportion of the New York Tax-Free Bond
Fund's assets in New York Municipal Obligations. Payment of interest and
preservation of principal is dependent upon the continuing ability of New York
issuers and/or obligors of state, municipal and public authority debt
obligations to meet their obligations thereunder. Investors should consider the
greater risk inherent in the New York Tax-Free Bond Fund's concentration in such
obligations versus the safety that comes with a less geographically concentrated
investment portfolio and should compare the yield available on a portfolio of
New York issues with the yield of a more diversified portfolio including
out-of-state issues before making an investment decision. The Adviser believes
that by maintaining the New York Tax-Free Bond Fund's investment portfolio in
liquid, shorter-term Municipal Obligations, the Fund is somewhat insulated from
the credit risks that may exist for long-term New York Municipal Obligations.
New York State and other issuers of New York Municipal Obligations have
historically experienced periods of financial difficulties which have caused the
credit ratings of certain of their obligations to be downgraded by certain
rating agencies. There can be no assurance that credit ratings on obligations of
New York State and New York City and other New York Municipal Obligations will
not be downgraded further. See "Investment Objective, Policies and Restrictions
- -- Special Factors Affecting New York" in the Statement of Additional
Information.
PORTFOLIO TURNOVER
The Sub-Advisers manage the Fixed Income Portfolio, Equity Fund, International
Equity Portfolio and Small Cap Equity Portfolio generally without regard to
restrictions on portfolio turnover, except those imposed by provisions of the
federal tax laws regarding short-term trading. In general, the Portfolios and
the Fund will not trade for short-term profits, but when circumstances warrant,
investments may be sold without regard to the length of time held. For the year
ended October 31, 1996, the portfolio turnover rate for the Fixed Income
Portfolio was 152%. It is expected that the annual turnover rate for the Fixed
Income Portfolio will not exceed 250% in subsequent fiscal years. For the year
ended October 31, 1996, the portfolio turnover rate for the Equity Fund was 86%
and it is expected that in subsequent years that the annual turnover rate for
the Fund will not exceed 100%. The portfolio turnover rate for the International
Equity Portfolio was 23% for the year ended October 31, 1996 and it is expected
that in subsequent years the annual turnover rate for the Portfolio will not
exceed 40%. The portfolio turnover rate for the Small Cap Equity Portfolio for
the period from September 3, 1996 (commencement of operations) to October 31,
1996 was 51%. Although this figure is reflective of the Small Cap Equity
Portfolio's initial period of operations, it is anticipated that the portfolio
turnover rate for the Small Cap Equity Portfolio may exceed 100% during the
Portfolio's first full fiscal year. Because the Fixed Income Portfolio and Small
Cap Equity Portfolio have portfolio turnover rates of 100% or more, transaction
costs incurred by the Portfolios and the realized capital gains and losses of
the Portfolios may be greater than those of a fund with a lesser portfolio
turnover rate. See "Portfolio Transactions" and "Tax Matters" below.
The Adviser fully manages the New York Tax-Free Bond Fund's portfolio by
buying and selling securities, as well as by holding selected securities to
maturity. In managing the New York Tax-Free Bond Fund's portfolio, the Trust
seeks to take advantage of market developments, yield disparities and variations
in the creditworthiness of issuers. For a description of the strategies which
are used in managing the New York Tax-Free Bond Fund's portfolio, which include
adjusting the average maturity of the New York Tax-Free Bond Fund's portfolio in
anticipation of a change in interest rates, see "Investment Objective, Policies
and Restrictions -- Portfolio Management" in the Statement of Additional
Information.
For the year ended October 31, 1996, the portfolio turnover rate for the New
York Tax-Free Bond Fund was 178%. The Adviser anticipates that in subsequent
years the annual turnover rate of the New York Tax-Free Bond Fund's assets will
be between 70% and 150% and generally will not exceed 300%. The Trust engages in
portfolio trading for the New York Tax-Free Bond Fund if it believes a
transaction net of costs (including custodian charges) will help achieve the
investment objective of the Fund. Expenses to the New York Tax-Free Bond Fund,
including brokerage commissions, and the realization of capital gains which are
taxable to the Fund's shareholders tend to increase as the portfolio turnover
increases.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain, and maintain the availability of,
execution at the most favorable prices and in the most effective manner
possible. For a further discussion of portfolio transactions, see "Investment
Objective, Policies and Restrictions -- Portfolio Transactions" in the
Statements of Additional Information.
The Trust may, in the future, seek to achieve the investment objectives of the
New York Tax-Free Bond Fund or Equity Fund by investing all of its assets in a
no-load, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the Funds. In such event, the Funds' Investment Advisory
Contracts or Investment Management Contracts would be terminated and the
administrative services fees paid by the Funds would be reduced. Such investment
would be made only if the Trustees of the Trust believe that the aggregate per
share expenses of the Funds and such other investment companies will be less
than or approximately equal to the expenses which the Funds would incur if the
Trust were to continue to retain the services of investment advisers for the
Funds and the assets of the Funds were to continue to be invested directly in
portfolio securities.
The investment policies of the Funds and the Portfolios are described above.
Except as otherwise stated, these investment policies may be changed by the
Board of Trustees of either the Trust or Advisor Trust without approval by the
shareholders of the Funds. The Statement of Additional Information includes a
further discussion of investment policies, including the investment of the New
York Tax-Free Bond Fund's assets in participation interests and the use of
futures contracts to protect the Fund to some extent from fluctuations in
interest rates, and a listing of the specific investment restrictions which
govern the investment policies of the Fund, including a restriction that not
more than 10% of the Fund's net assets may be invested in securities that are
not readily marketable, such as repurchase agreements maturing in more than
seven days. Although the Trust currently does not borrow money on behalf of the
New York Tax-Free Bond Fund for the purpose of leveraging, these restrictions
permit the Trust to borrow money on behalf of the Fund for certain other
purposes in amounts up to 33 1/3% of the Fund's net assets (although no
securities will be purchased for the Fund at any time at which borrowings exceed
5% of the Fund's total assets taken at market value). These specific investment
restrictions and the fundamental policy described above may not be changed
without the approval of New York Tax-Free Bond Fund shareholders. If a
percentage restriction (other than a restriction as to borrowing) or a rating
restriction on investment or utilization of assets is adhered to at the time an
investment is made, or assets are so utilized, a later change in percentage
resulting from changes in the value of the New York Tax-Free Bond Fund's
portfolio securities or a later change in the rating of a portfolio security are
not considered a violation of policy.
INVESTMENT RESTRICTIONS
Each of the Funds and the Portfolios has adopted certain investment
restrictions designed to reduce exposure to specific situations (except that
none of these investment restrictions shall prevent the Funds from investing all
of their Assets in a registered investment company with substantially the same
investment objective). These investment restrictions are set forth in the
Statement of Additional Information.
Certain limitations described in the Statements of Additional Information are
fundamental and may be changed only with the approval of the holders of a
"majority of the outstanding voting securities" (as defined in the 1940 Act) of
the respective Portfolio or Fund, as the case may be. The other investment
restrictions described in the Statements of Additional Information are not
fundamental policies meaning that the Board of Trustees of the Portfolio Trust
may change them without investor approval. If a percentage limitation on
investment or utilization of assets as set forth in the Statements of Additional
Information is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of a Fund's or
Portfolio's assets will not be considered a violation of the restriction, and
the sale of securities will not be required.
SPECIAL INFORMATION CONCERNING THE TWO-TIER FUND STRUCTURE
The Advisor Trust, which is an open-end investment company, seeks to achieve
the investment objectives of the Fixed Income Fund, International Equity Fund
and Small Cap Equity Fund by investing all of each Fund's investible assets in
the Fixed Income Portfolio, International Equity Portfolio, and the Small Cap
Equity Portfolio, respectively, series of a separate open-end investment company
with the same investment objectives as each respective Fund. Other mutual funds
or institutional investors may invest in the Portfolios on the same terms and
conditions as the Funds. However, these other investors may have different sales
commissions and other operating expenses which may generate different aggregate
performance results. Information concerning other investors in the Portfolios is
available by calling the Sponsor at (614) 470-8000. The two-tier investment fund
structure has been developed relatively recently, so shareholders should
carefully consider this investment approach.
The investment objectives of the Advisor Funds may be changed without the
approval of the shareholders of the Advisor Funds and the investment objectives
of the Portfolios may be changed without the approval of the investors in the
Portfolios. Shareholders of the Advisor Funds shall receive 30 days prior
written notice of any change in the investment objective of an Advisor Fund or a
Portfolio. For a description of the investment objectives, policies and
restrictions of the Portfolios, see "Investment Objectives and Policies" above.
Except as permitted by the Securities and Exchange Commission, whenever the
Advisor Trust is requested to vote on a matter pertaining to a Portfolio, the
Advisor Trust will hold a meeting of the shareholders of the corresponding
Advisor Fund and, at the meeting of investors in the Portfolio, the Advisor
Trust will cast all of its votes in the same proportion as the votes of the
Advisor Fund's shareholders even if all Advisor Fund shareholders did not vote.
Even if the Advisor Trust votes all its shares at the Portfolio meeting, other
investors with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio.
The Advisor Trust may withdraw an Advisor Fund's investment in its
corresponding Portfolio as a result of certain changes in the Portfolio's
investment objective, policies or restrictions or if the Board of Trustees of
the Trust determines that it is otherwise in the best interests of the Advisor
Fund to do so. Upon any such withdrawal, the Board of Trustees of the Advisor
Trust would consider what action might be taken, including the investment of all
of the assets of the Advisor Fund in another pooled investment entity or the
retaining of an investment adviser to manage the Advisor Fund's assets in
accordance with the investment policies described above with respect to the
corresponding Portfolio. In the event the Trustees of the Advisor Trust were
unable to accomplish either, the Trustees will determine the best course of
action.
As with traditionally structured funds which have large investors, the actions
of such large investors may have a material affect on smaller investors. For
example, if a large investor withdraws from a Portfolio, a small remaining fund
may experience higher pro rata operating expenses, thereby producing lower
returns. Additionally, a Portfolio may become less diverse, resulting in
increased portfolio risk.
For descriptions of the management and expenses of the Portfolios, see
"Management of the Trust, Advisor Trust and the Portfolio Trust" below and in
the Statements of Additional Information.
MANAGEMENT OF THE TRUST, THE ADVISOR TRUST AND THE PORTFOLIO TRUST
The business and affairs of the Trust, the Advisor Trust and the Portfolio
Trust are managed under the direction of their respective Boards of Trustees.
The Trustees of each of the Trust, the Advisor Trust and the Portfolio Trust are
Frederick C. Chen, Alan S. Parsow, Larry M. Robbins and Michael Seely.
Additional information about the Trustees, as well as the executive officers of
the Trust, the Advisor Trust and the Portfolio Trust, may be found in the
Statements of Additional Information under the caption "Management of the Trust
and the Portfolio Trust -- Trustees and Officers".
A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust, the Advisor Trust
and the Portfolio Trust. Under the conflicts of interest procedures, the
Trustees will review on a quarterly basis any potential conflicts of interests
after consulting with Fund counsel, the Manager and the Fund Administrator. If a
potential conflict of interest arises, the Board of Trustees of the entity that
may be adversely affected will take such action as is reasonably appropriate to
resolve the conflict, up to and including establishing a new Board of Trustees
for such entity. See "Management of the Trust and the Portfolio Trust" in the
Statements of Additional Information for more information about the Trustees and
the executive officers of the Trust, the Advisor Trust and the Portfolio Trust.
INVESTMENT MANAGER/ADVISER
Republic, whose address is 452 Fifth Avenue, New York, New York 10018, serves
as investment manager to the Portfolios pursuant to Investment Management
Contracts with the Portfolio Trust. Subject to the general guidance and the
policies set by the Trustees of the Portfolio Trust, Republic provides general
supervision over the investment management functions performed by the
Sub-Advisers. For its services under the Investment Management Contracts, the
Manager is entitled to receive from the Portfolio Trust fees, payable monthly,
at the annual rate of 0.20% of the Fixed Income Portfolio's average daily net
assets and at the annual rate of 0.25% of each of the International Equity
Portfolio's and Small Cap Equity Portfolio's average daily net assets. The
Manager is currently waiving these fees.
Republic also serves as investment adviser to the New York Tax-Free Bond Fund.
The Adviser manages the investment and reinvestment of the assets of the New
York Tax-Free Bond Fund and continuously reviews, supervises and administers the
Fund's investments pursuant to an Investment Advisory Contract. Subject to such
policies as the Board of Trustees of the Trust may determine, the Adviser places
orders for the purchase and sale of the New York Tax-Free Bond Fund's
investments directly with brokers or dealers selected by it in its discretion.
The Adviser does not place orders with the Distributor. Ms Debra L. Crovicz,
Vice President of Republic, is the individual who is primarily responsible for
the day-to-day management of the New York Tax-Free Bond Fund's portfolio. Prior
to joining Republic, Ms Crovicz was a senior portfolio manager at Citibank, N.A.
where she managed approximately $1.5 billion in tax-exempt bond portfolios and
was a portfolio manager and trader in the Fixed Income Department of United
States Trust Company of New York. For its services under the Investment Advisory
Contract, the Adviser receives from the New York Tax-Free Bond Fund a fee,
payable monthly, at the annual rate of 0.25% of the Fund's average daily net
assets. Republic is currently waiving this fee.
Republic also serves as investment manager to the Equity Fund pursuant to an
Investment Management Contract with the Trust. For its services to the Equity
Fund, the Manager is paid a fee by the Equity Fund, computed daily and based on
the Fund's average daily net assets, equal on an annual basis to 0.175% of the
Fund's average daily net assets.
Republic is a wholly owned subsidiary of Republic New York Corporation, a
registered bank holding company. As of March 31, 1996, Republic was the 11th
largest commercial bank in the United States measured by deposits and the 14th
largest commercial bank measured by shareholder equity. Republic or an affiliate
of Republic serves as investment adviser to the other series of the Trust.
Republic currently provides investment advisory services for individuals,
trusts, estates and institutions.
Republic and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of obligations purchased for the Funds or
Portfolios, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of obligations so purchased. With respect to
the New York Tax-Free Bond Fund, Republic and its affiliates deal, trade and
invest for their own accounts in Municipal Obligations and are dealers of
various types of Municipal Obligations. Republic and its affiliates may sell
Municipal Obligations to, and purchase them from, other investment companies
sponsored by BISYS. The Adviser will not invest any New York Tax-Free Bond Fund
assets in any Municipal Obligation purchased from itself or any affiliate,
although under certain circumstances such obligations may be purchased from
other members of an underwriting syndicate in which Republic or an affiliate is
a non-principal member. This restriction should not limit the amount or type of
Municipal Obligations available to be purchased for the Fund.
Republic has informed the Trust that, in making its investment decisions, it
does not obtain or use material inside information in the possession of any
division or department of Republic or in the possession of any affiliate of
Republic.
Based upon the advice of counsel, Republic believes that the performance of
investment advisory and other services for the Funds and Portfolios will not
violate the Glass-Steagall Act or other applicable banking laws or regulations.
However, future statutory or regulatory changes, as well as future judicial or
administrative decisions and interpretations of present and future statutes and
regulations, could prevent Republic from continuing to perform such services for
the Funds and Portfolios. If Republic were prohibited from acting as investment
manager to the Funds and Portfolios, it is expected that the Board of Trustees
of the Trust and the Advisor Trust would recommend to Fund shareholders approval
of a new investment advisory agreement with another qualified investment adviser
selected by the Board, or that the Board, would recommend other appropriate
action.
SUB-ADVISERS
Fixed Income Fund. MAS continuously manages the investment portfolio of the
Fixed Income Portfolio pursuant to a Sub-Advisory Agreement with the Manager.
For its services, the Fixed Income Sub-Adviser is paid a fee by the Portfolio,
computed daily and based on the Portfolio's average daily net assets, equal on
an annual basis to 0.375% of net assets up to $50 million, 0.25% of net assets
over $50 million up to $95 million, $300,000 of net assets over $95 million up
to $150 million, 0.20% of net assets over $150 million up to $250 million, and
0.15% of net assets over $250 million. It is the responsibility of the Fixed
Income Sub-Adviser not only to make investment decisions for the Fixed Income
Portfolio, but also to place purchase and sale orders for the portfolio
transactions of the Portfolio. See "Portfolio Transactions."
MAS, whose address is One Tower Bridge, West Conshohocken, Pennsylvania 19428,
is a Pennsylvania limited partnership founded in 1969. MAS provides investment
services to employee benefit plans, endowment funds, foundations and other
institutional investors. As of March 31, 1996, MAS had in excess of $36.2
billion in assets under management.
On January 3, 1996, Morgan Stanley Group Inc. acquired MAS in a transaction
in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly
owned subsidiary of Morgan Stanley Group Inc., became the sole general partner
of MAS. Morgan Stanley Asset Management Holdings Inc. and two other wholly
owned subsidiaries of Morgan Stanley Group Inc. became the limited partners of
MAS. Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries are engaged in a wide range of financial services.
Kenneth B. Dunn, whose business experience for the past five years is provided
below, is the individual portfolio manager responsible for management of the
Fixed Income Portfolio.
Partner, MAS, since prior to 1991. Portfolio Manager, MAS
Fixed Income and MAS Domestic Fixed Income Portfolios, since
1987; MAS Fixed Income II Portfolio, since 1990; MAS
Mortgage-Backed Securities and Special Purpose Fixed Income
Portfolios, since 1992; and, MAS Municipal and PA Municipal
Portfolios, since 1994.
Equity Fund. Alliance and Brinson each continuously manages a portion of the
investment portfolio of the Equity Fund, subject to the supervision and
direction of the Manager, pursuant to a Sub-Advisory Agreement with the Manager.
The Manager determines the allocation of the Equity Fund's assets between
Alliance and Brinson. For their services, Alliance and Brinson are each paid a
fee by the Equity Fund, computed daily and based on the Fund's average daily net
assets allocated to such Equity Sub-Adviser for management, equal on an annual
basis to 0.325% of net assets up to $50 million, 0.25% of net assets over $50
million up to $100 million, 0.20% of net assets over $100 million up to $200
million, and 0.15% of net assets over $200 million. It is the responsibility of
each Equity Sub-Adviser not only to make investment decisions for the Equity
Fund, but also to place purchase and sale orders for the Portfolio transactions
of the Fund.
Alliance, a Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105, is a leading international investment
manager supervising client accounts with assets as of September 30, 1996
totalling approximately $173.7 billion. Alliance has six offices in the United
States, and subsidiaries of Alliance operate out of offices in Bahrain,
Istanbul, London, Luxembourg, Mumbai (Bombay), Paris, Singapore, Sao Paulo,
Sydney, Tokyo and Toronto. Alliance and its subsidiaries employ over 1,300
persons worldwide.
Alliance's clients are primarily major corporate employee benefit funds,
public employee retirement systems, investment companies, foundations and
endowment funds. The 51 registered investment companies managed by Alliance
comprising 110 separate investment portfolios currently have over two million
shareholders. There are 20 other non-U.S. investment companies comprising 20
separate investment portfolios also managed by Alliance. As of September 30,
1996, Alliance was retained as an investment manager of employee benefit fund
assets for 33 of the Fortune 100 companies.
Alliance Capital Management Corporation ("ACMC") is the general partner of
Alliance and conducts no other active business. Units representing assignment of
beneficial ownership of limited partnership interests of Alliance are publicly
traded on the New York Stock Exchange. As of September 30, 1996, The Equitable
Life Assurance Society of the United States ("Equitable"), ACMC, Inc. and
Equitable Capital Management Corporation ("ECMC") were the beneficial owners of
approximately 57.4% of the outstanding units of Alliance. ACMC, ECMC, and ACMC,
Inc. are wholly owned subsidiaries of Equitable. Equitable, a New York life
insurance company, had total assets as of June 30, 1996 of over $70.9 billion.
Equitable is a wholly owned subsidiary of The Equitable Companies Incorporated,
a Delaware corporation ("ECI"), whose shares are publicly traded on the New York
Stock Exchange. As of March 1, 1996, AXA, a French insurance holding company,
owned 63.9% of the issued and outstanding shares of the common stock of ECI.
John L. Blundin, an Executive Vice President and Portfolio Manager, and
Christopher Toub, a Senior Vice President and Equity Portfolio Manager, have
primary portfolio management responsibility for the Equity Fund's assets
allocated to Alliance. Mr. Blundin has 32 years of investment experience,
including 24 years of experience as a portfolio manager at Alliance. Mr. Toub
has 16 years of investment experience, including five years of experience as a
portfolio manager at Alliance. Prior to joining Alliance in 1992, Mr. Toub was a
Portfolio Manager at Marcus, Schloss & Co.
Brinson, a Delaware corporation, is an investment management firm managing, as
of June 30, 1996, approximately $58 billion, primarily for pension and profit
sharing institutional accounts. Brinson was organized in 1989 when it acquired
the institutional asset management business of The First National Bank of
Chicago and First Chicago Investment Advisors, N.A. Brinson and its predecessor
entities have managed domestic and international investment assets since 1974
and global investment assets since 1982. Brinson has offices in Basel, London,
Melbourne, New York, Paris, Singapore, Sydney and Tokyo, in addition to its
principal office at 209 South LaSalle Street, Chicago, IL 60604-1295. Brinson is
an indirect wholly owned subsidiary of Swiss Bank Corporation ("Swiss Bank"),
Swiss Bank, with headquarters in Basel, Switzerland, is an internationally
diversified organization with operations in many aspects of the financial
services industry. Brinson also serves as the investment advisor to seven other
investment companies.
Jeffrey J. Diermeier, Managing Partner-U.S. Equities at Brinson, has primary
portfolio management responsibility for the Fund's assets allocated to
Brinson. Mr. Diermeier has 21 years of investment experience at Brinson.
International Equity Fund. CGTC continuously manages the investment portfolio
of the International Equity Portfolio pursuant to a Sub-Advisory Agreement with
the Manager. For its services, the International Equity Sub-Adviser is paid a
fee by the International Equity Portfolio, computed daily and based on the
Portfolio's average daily net assets, equal on an annual basis to 0.70% of net
assets up to $25 million, 0.55% of net assets over $25 million up to $50
million, 0.425% of net assets over $50 million up to $250 million, and 0.375% of
net assets over $250 million. It is the responsibility of the International
Equity Sub-Adviser not only to make investment decisions for the International
Equity Portfolio, but also to place purchase and sale orders for the portfolio
transactions of the Portfolio. See "Portfolio Transactions."
CGTC, which was founded in 1968, is a wholly owned subsidiary of The Capital
Group Companies, Inc., both of which are located at 333 South Hope Street, Los
Angeles, California 90071. As of December 31, 1996 CGTC managed in excess of $56
billion of assets primarily for large institutional clients. CGTC's research
activities are conducted by affiliated companies with offices in Los Angeles,
San Francisco, New York, Washington, D.C., Atlanta, London, Geneva, Singapore,
Hong Kong and Tokyo.
Capital Research and Management Company ("CRMC"), another wholly owned
subsidiary of The Capital Group Companies, Inc., provides investment advisory
services to the following mutual funds, which are know collectively as the
American Funds Group: AMCAP Fund, American Balanced Fund, American High Income
Municipal Bond Fund, American High Income Trust, American Mutual Fund, The Bond
Fund of America, The Cash Management Trust of America, Capital Income Builder,
Inc., Capital World Bond Fund, EuroPacific Growth Fund, Fundamental Investors,
The Growth Fund of America, Income Fund of America, Intermediate Bond Fund of
America, The Investment Company of America, Limited Term Tax-Exempt Bond Fund of
America, The New Economy Fund, New Perspective Fund, Smallcap World Fund, The
Tax-Exempt Bond Fund of America, The American Funds Tax-Exempt Series I, The
American Funds Tax-Exempt Series II, The Tax-Exempt Money Fund of America, The
American Funds Income Series, The U.S. Treasury Money Fund of America,
Washington Mutual Investors Fund, and Capital World Growth and Income Fund. CRMC
also provides investment advisory services to: American Variable Insurance
Series and Anchor Pathway Fund, which are used exclusively as underlying
investment vehicles for variable insurance contracts and policies, and to
Endowments, Inc. and Bond Portfolio for Endowments, Inc., whose shares may be
owned only by tax-exempt organizations. Capital International, Inc., an indirect
wholly owned subsidiary of The Capital Group Companies, Inc., provides
investment advisory services to Emerging Markets Growth Fund, Inc., which is a
closed-end investment company.
The following persons are primarily responsible for portfolio management of
the International Equity Portfolio: David Fisher, Vice Chairman of CGTC, has had
31 years experience as an investment professional (27 years with CGTC or its
affiliates); Harmut Giesecke, Senior Vice President and Director of Capital
International, Inc., has had 25 years experience as an investment professional
(24 years with CGTC or its affiliates); Nancy Kyle, Senior Vice President of
CGTC, has had 23 years experience as an investment professional (6 years with
CGTC or its affiliates; from 1980 to 1990, Ms. Kyle was managing director of J.
P. Morgan Investment Management, Inc.); John McIlwraith, Senior Vice President
of CGTC, has had 27 years experience as an investment professional (13 years
with CGTC or its affiliates); Robert Ronus, President of CGTC, has had 28 years
experience as an investment professional (24 years with CGTC or its affiliates);
and Nilly Sikorsky, Director of The Capital Group Companies, Inc., has had 34
years experience as an investment professional, all of which was with CGTC or
its affiliates.
Small Cap Equity Fund. MIA continuously manages the investment portfolio of
the Small Cap Equity Portfolio pursuant to a Sub-Advisory Agreement with the
Manager. For its services, the Small Cap Equity Sub-Adviser is paid a fee by the
Small Cap Equity Portfolio, computed daily and based on the Portfolio's average
daily net assets, equal on an annual basis to 0.75% of assets up to $50 million
and 0.60% of assets in excess of $50 million. It is the responsibility of the
Small Cap Equity Sub-Adviser not only to make investment decisions for the Small
Cap Equity Portfolio, but also to place purchase and sale orders for the
portfolio transactions of the Portfolio. See "Portfolio Transactions."
The Small Cap Equity Sub-Adviser, together with its parent company,
Massachusetts Financial Services Company ("MFS"), is America's oldest mutual
fund organization. MFS and its predecessor organizations have a history of money
management dating from 1924 and the founding of the first mutual fund in the
U.S., Massachusetts Investors Trust. Net assets under the management of the MFS
organization were approximately $45.9 billion on behalf of approximately 2.1
million investor accounts as of July 31, 1996. As of such date, the MFS
organization managed approximately $22.1 billion of assets invested in equity
securities, approximately $19.5 billion of assets invested in fixed income
securities, and $4.0 billion of assets invested in securities of foreign issuers
and non-U.S. dollar securities. MFS is a wholly owned subsidiary of Sun Life
Assurance Company of Canada (U.S.), which in turn is a wholly owned subsidiary
of Sun Life Assurance Company of Canada ("Sun Life"). Sun Life, a mutual life
insurance company, is one of the largest international life insurance companies
and has been operating in the U.S. since 1895, establishing a headquarters
office in the U.S. in 1973. The executive officers of MFS report to the Chairman
of Sun Life.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial will
share their views on a variety of investment-related issues, such as the
economy, securities markets, portfolio securities and their issuers, investment
recommendations, strategies and techniques, risk analysis, trading strategies
and other portfolio management matters. MFS will have access to the extensive
international equity investment expertise of Foreign & Colonial, and Foreign &
Colonial will have access to the extensive U.S. equity investment expertise of
MFS. One or more MFS investment analysts are expected to work for an extended
period with Foreign & Colonial's portfolio managers and investment analysts at
their offices in London. In return, one or more Foreign & Colonial employees are
expected to work in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Small
Cap Equity Portfolio as well as for portfolios of other clients of the Small Cap
Equity Sub-Adviser or MFS or clients of Foreign & Colonial. Some simultaneous
transactions are inevitable when several clients receive investment advice from
MFS and Foreign & Colonial, particularly when the same security is suitable for
more than one client. While in some cases this arrangement could have a
detrimental effect on the price or availability of the security as far as the
Small Cap Equity Portfolio is concerned, in other cases, however, it may produce
increased investment opportunities for the Portfolio.
The portfolio managers of the Small Cap Equity Portfolio are John W. Ballen
and Brian Stack, Senior Vice President and Vice President respectively, of the
Small Cap Equity Sub-Adviser. Mr. Ballen has been employed as a portfolio
manager by the Small Cap Equity Sub-Adviser or MFS since prior to 1991. Mr.
Stack has been employed as a portfolio manager or analyst by the Small Cap
Equity Sub-Adviser or MFS since prior to 1991.
MFS also serves as investment adviser to the MFS Family of Funds and to MFS
Municipal Income Trust, MFS Multimarket Income Trust, MFS Government Markets
Income Trust, MFS Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust, MFS Union Standard Trust, MFS Variable Insurance Trust,
MFS/Sun Life Series Trust, Sun Growth Variable Annuity Fund, Inc. and seven
variable accounts, each of which is a registered investment company established
by Sun Life of Canada (U.S.) in connection with the sale of various
fixed/variable annuity contracts. MFS and the Small Cap Equity Sub-Adviser also
provide investment advice to substantial private clients.
DISTRIBUTOR AND SPONSOR
BISYS, whose address is 3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219,
acts as sponsor and principal underwriter and distributor of Shares of the Funds
pursuant to a Distribution Contract with the Trust and the Advisor Trust. The
Distributor may, out of its own resources, make payments to broker-dealers for
their services in distributing Shares.
ADMINISTRATIVE SERVICES PLAN
The Trust has adopted an Administrative Services Plan with respect to Shares
of the New York Tax-Free Bond and Equity Funds which provides that the Trust may
obtain the services of an administrator, transfer agent, custodian and one or
more Shareholder Servicing Agents, and may enter into agreements providing for
the payment of fees for such services.
FUND ADMINISTRATOR AND PORTFOLIO ADMINISTRATOR
Pursuant to an Administration Agreement, BISYS provides the Funds with general
office facilities and supervises the overall administration of the Funds and the
Portfolios including, among other responsibilities, assisting in the preparation
and filing of all documents required for compliance by the Funds and the
Portfolios with applicable laws and regulations and arranging for the
maintenance of books and records of the Funds and the Portfolios. For its
services to the New York Tax-Free Bond Fund and Equity Fund, BISYS receives from
each Fund fees payable monthly equal on an annual basis (for the Fund's
then-current fiscal year) to 0.10% of the Fund's average daily net assets up to
$1 billion; 0.08% of the next $1 billion of such assets; and 0.07% of such
assets in excess of $2 billion. For its services to the Fixed Income Fund,
International Equity Fund and Small Cap Equity Fund, BISYS receives from each
Fund fees payable monthly equal on an annual basis (for the Fund's then-current
fiscal year) to 0.05% of the Fund's average daily net assets up to $1 billion;
0.04% of the next $1 billion of such assets; and 0.035% of such assets in excess
of $2 billion. For providing similar services to the Portfolios, BISYS (Ireland)
receives from each Portfolio fees payable monthly equal on an annual basis (for
the Portfolio's then-current fiscal year) to 0.05% of the first $1 billion of a
Portfolio's average daily net assets; 0.04% of the next $1 billion of such
assets; and 0.035% of such assets in excess of $2 billion.
BISYS provides persons satisfactory to the respective Boards of Trustees to
serve as officers of the Trust, the Advisor Trust and the Portfolio Trust. Such
officers, as well as certain other employees of the Trust, of the Advisor Trust
and of the Portfolio Trust, may be directors, officers or employees of BISYS or
its affiliates.
TRANSFER AGENT AND CUSTODIAN
The Trust and the Advisor Trust has each entered into a Transfer Agency
Agreement with Investors Bank & Trust Company ("IBT") pursuant to which IBT acts
as transfer agent (the "Transfer Agent") for the Funds, and the Portfolios Trust
has entered into a Transfer Agency Agreement with Investors Fund Services
(Ireland) Limited (also, a "Transfer Agent"). The Transfer Agent maintains an
account for each shareholder of the Funds and investor in the Portfolios,
performs other transfer agency functions, and acts as dividend disbursing agent
for the Funds. Pursuant to respective Custodian Agreements, IBT also acts as the
custodian (the "Custodian") of the assets of the Funds and the Portfolios. The
Portfolio Trust's Custodian Agreement provides that the Custodian may use the
services of sub-custodians with respect to the Portfolios. The Custodian's
responsibilities include safeguarding and controlling each Fund's cash and each
Portfolio's cash and securities, and handling the receipt and delivery of
securities, determining income and collecting interest on each Portfolio's
investments, maintaining books of original entry for portfolio accounting and
other required books and accounts, and calculating the daily net asset value of
each Portfolio. Securities held for the Portfolios may be deposited into the
Federal Reserve-Treasury Department Book Entry System or the Depositary Trust
Company. The Custodian does not determine the investment policies of the Funds
or the Portfolios or decide which securities will be purchased or sold for the
Portfolios. Assets of the Portfolios may, however, be invested in securities of
the Custodian and the Portfolio Trust may deal with the Custodian as principal
in securities transactions for the Portfolios. For its services, IBT receives
such compensation as may from time to time be agreed upon by it and the Trust or
the Portfolio Trust.
SHAREHOLDER SERVICING AGENTS
The Trust has entered into a shareholder servicing agreement (a "Servicing
Agreement") with each Shareholder Servicing Agent, including Republic, pursuant
to which a Shareholder Servicing Agent, as agent for its customers, among other
things: answers customer inquiries regarding account status and history, the
manner in which purchases and redemptions of Shares may be effected and certain
other matters pertaining to the Funds; assists shareholders in designating and
changing dividend options, account designations and addresses; provides
necessary personnel and facilities to establish and maintain shareholder
accounts and records; assists in processing purchase and redemption
transactions; arranges for the wiring of funds; transmits and receives funds in
connection with customer orders to purchase or redeem Shares; verifies and
guarantees shareholder signatures in connection with redemption orders and
transfers and changes in shareholder-designated accounts; furnishes (either
separately or on an integrated basis with other reports sent to a shareholder by
a Shareholder Servicing Agent) monthly and year-end statements and confirmations
of purchases and redemptions; transmits, on behalf of the Trust and the Advisor
Trust proxy statements, annual reports, updated prospectuses and other
communications from the Trust and the Advisor Trust to the shareholders of the
Funds; receives, tabulates and transmits to the Trust and the Advisor Trust
proxies executed by shareholders with respect to meetings of shareholders of the
Funds the Trust or the Advisor Trust; and provides such other related services
as the Trust and the Advisor Trust or a shareholder may request. The Funds do
not compensate Shareholder Servicing Agents for performing these services with
respect to the Shares.
The Trust and the Advisor Trust understand that some Shareholder Servicing
Agents also may impose certain conditions on their customers, subject to the
terms of this Prospectus, in addition to or different from those imposed by the
Trust or the Advisor Trust, such as requiring a different minimum initial or
subsequent investment, account fees (a fixed amount per transaction processed),
compensating balance requirements (a minimum dollar amount a customer must
maintain in order to obtain the services offered), or account maintenance fees
(a periodic charge based on a percentage of the assets in the account or of the
dividends paid on those assets). Each Shareholder Servicing Agent has agreed to
transmit to its customers who are holders of Shares appropriate prior written
disclosure of any fees that it may charge them directly and to provide written
notice at least 30 days prior to the imposition of any transaction fees.
The Glass-Steagall Act prohibits certain financial institutions from engaging
in the business of underwriting securities of open-end investment companies,
such as shares of the Funds. The Trust and the Advisor Trust engage banks as
Shareholder Servicing Agents on behalf of the Funds only to perform
administrative and shareholder servicing functions as described above. The Trust
and the Advisor Trust believe that the Glass-Steagall Act should not preclude a
bank from acting as a Shareholder Servicing Agent. There is presently no
controlling precedent regarding the performance of shareholder servicing
activities by banks. Future changes in either federal statutes or regulations
relating to the permissible activities of banks, as well as future judicial or
administrative decisions and interpretations of present and future statutes and
regulations, could prevent a bank from continuing to perform all or part of its
servicing activities. If a bank were prohibited from so acting, its shareholder
customers would be permitted to remain Fund shareholders, and alternative means
for continuing the servicing of such shareholders would be sought. In such
event, changes in the operation of the Funds might occur and a shareholder
serviced by such bank might no longer be able to avail himself of any automatic
investment or other services then being provided by such bank. The Trustees of
the Trust and the Advisor Trust do not expect that shareholders of the Funds
would suffer any adverse financial consequences as a result of these
occurrences.
OTHER EXPENSES
The Funds bear all costs of their operations other than expenses specifically
assumed by the Distributor, Manager, Advisor or the Sub-Advisers. See
"Management of the Trust and the Portfolio Trust -- Expenses and Expense Limits"
in the Statements of Additional Information. Expenses attributable to the Shares
shall be allocated to the Shares only. In event a particular expense is not
reasonably allocable by class or to a particular class, it shall be treated as a
Fund expense or a Trust or Advisor Trust expense. Trust expenses directly
attributable to a Fund are charged to that Fund; other expenses are allocated
proportionately among all the portfolios in the Trust or the Advisor Trust in
relation to the net assets of each portfolio.
PORTFOLIO TRANSACTIONS
To the extent consistent with applicable legal requirements, the Sub-Advisers
may place orders for the purchase and sale of portfolio investments for the
Portfolios with Republic New York Securities Corporation, subject to obtaining
best price and execution for a particular transaction. See the Statements of
Additional Information.
CLASSES OF SHARES
In addition to the Adviser Shares of the New York Tax-Free Bond Fund and the
Equity Fund, the Trust currently offers one other class of shares of these
Funds, the Class C shares (the "Investor Shares"), pursuant to a separate
prospectus. Adviser Shares may have different class expenses, which may affect
performance. Investors may obtain information concerning other classes of shares
of the New York Tax-Free Bond Fund and Equity Fund directly from their
Shareholder Servicing Agent, or by calling 1-800-782-8183.
DETERMINATION OF NET ASSET VALUE
The net asset value of a particular share in a Fund is determined on each day
on which the New York Stock Exchange is open for regular trading ("Fund Business
Day"). This determination is made once during each such day as of 4:00 p.m., New
York time, by dividing the value of each Fund's net assets (i.e., the value of
its investment in its corresponding Portfolio, if applicable, and other assets
less its liabilities, including expenses payable or accrued) by the number of
Shares outstanding at the time the determination is made.
The value of each Fund's investment in its corresponding Portfolio, if
applicable, is also determined once daily at 4:00 p.m., New York time, on each
day the New York Stock Exchange is open for regular trading ("Portfolio Business
Day").
The determination of the value of a Fund's investment in its corresponding
Portfolio is made by subtracting from the value of the total assets of the
Portfolio the amount of the Portfolio's liabilities and multiplying the
difference by the percentage, effective for that day, which represents the
Fund's share of the aggregate beneficial interests in the Portfolio.
Values of assets in a Fund's portfolio or held by a Portfolio are determined
on the basis of their market or other fair value, as described in the Statement
of Additional Information.
PURCHASE OF SHARES
Shares may be purchased through Shareholder Servicing Agents without a sales
load at their net asset value next determined after an order is received by a
Shareholder Servicing Agent if it is transmitted to and accepted by the Transfer
Agent. Purchases are therefore effected on the same day the purchase order is
received by the Transfer Agent provided such order is received prior to 4:00
p.m., New York time, on any Fund Business Day. The Trust and the Advisor Trust
intend the Funds to be as fully invested at all times as is reasonably
practicable in order to enhance the yield on their assets. Each Shareholder
Servicing Agent is responsible for and required to promptly forward orders for
shares to the Transfer Agent.
All purchase payments are invested in full and fractional Shares. The Trust
and the Advisor Trust each reserve the right to cease offering Shares for sale
at any time or to reject any order for the purchase of Shares.
An investor may purchase Shares through the Distributor directly or by
authorizing his Shareholder Servicing Agent to purchase such Shares on his
behalf through the Transfer Agent.
Exchange Privilege. By contacting the Transfer Agent or his Shareholder
Servicing Agent, a shareholder may exchange some or all of his Shares for shares
of one or more of the following investment companies (or series thereof) at net
asset value without a sales charge: Republic U.S. Government Money Market Fund
(Adviser Class), Republic New York Tax-Free Money Market Fund (Adviser Class),
Republic Fixed Income Fund, Republic New York Tax-Free Bond Fund (Adviser
Class), Republic Equity Fund (Adviser Class), Republic International Equity
Fund, Republic Small Cap Equity Fund and such other Republic Funds or other
registered investment companies (or series thereof) for which Republic serves as
investment adviser as Republic may determine. An exchange may result in a change
in the number of Shares held, but not in the value of such Shares immediately
after the exchange. Each exchange involves the redemption of the Shares to be
exchanged and the purchase of the shares of the other Republic Fund which may
produce a gain or loss for tax purposes.
The exchange privilege (or any aspect of it) may be changed or discontinued
upon 60 days' written notice to shareholders and is available only to
shareholders in states in which such exchanges legally may be made. A
shareholder considering an exchange should obtain and read the prospectus of the
other Republic Fund and consider the differences in investment objectives and
policies before making any exchange.
Shares are being offered only to customers of Shareholder Servicing Agents.
Shareholder Servicing Agents and securities brokers may offer services to their
customers, including specialized procedures for the purchase and redemption of
Shares, such as pre-authorized or automatic purchase and redemption programs.
Each Shareholder Servicing Agent may establish its own terms, conditions and
charges, including limitations on the amounts of transactions, with respect to
such services. Charges for these services may include fixed annual fees, account
maintenance fees and minimum account balance requirements. The effect of any
such fees will be to reduce the net return on the investment of customers of
that Shareholder Servicing Agent. Conversely, certain Shareholder Servicing
Agents may (although they are not required by the Trust or the Advisor Trust to
do so) credit to the accounts of their customers from whom they are already
receiving other fees amounts not exceeding such other fees or the fees received
by the Shareholder Servicing Agent from each Fund, which will have the effect of
increasing the net return on the investment of such customers of those
Shareholder Servicing Agents.
Shareholder Servicing Agents may transmit purchase payments on behalf of their
customers by wire directly to a Fund's custodian bank by following the
procedures described above.
For further information on how to direct a Shareholder Servicing Agent to
purchase Shares, an investor should contact his Shareholder Servicing Agent (see
back cover for address and phone number).
RETIREMENT PLANS
Shares of the Funds, with the exception of the New York Tax-Free Bond Fund,
are offered in connection with tax-deferred retirement plans. Application forms
and further information about these plans, including applicable fees, are
available from the Trust, the Advisor Trust or the Sponsor upon request.
Recently enacted federal tax legislation has substantially affected the tax
treatment of contributions to certain retirement plans. Before investing in the
Equity Fund through one or more of these plans, an investor should consult his
or her tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Funds, with the exception of the New York Tax-Free Bond Fund,
may be used as a funding medium for an IRA. An Internal Revenue Service-approved
IRA plan may be available from an investor's Shareholder Servicing Agent. In any
event, such a plan is available from the Sponsor naming IBT, as custodian. The
minimum initial investment for an IRA is $250; the minimum subsequent investment
is $100. IRAs are available to individuals who receive compensation or earned
income and their spouses whether or not they are active participants in a
tax-qualified or Government-approved retirement plan. An IRA contribution by an
individual who participates, or whose spouse participates, in a tax-qualified or
Government-approved retirement plan may not be deductible depending upon the
individual's income. Individuals also may establish an IRA to receive a
"rollover" contribution of distributions from another IRA or a qualified plan.
Tax advice should be obtained before planning a rollover.
DEFINED CONTRIBUTION PLANS
Investors who are self-employed may purchase Shares of the Funds, with the
exception of the New York Tax-Free Bond Fund, for retirement plans for
self-employed persons which are known as Defined Contribution Plans (formerly
Keogh or H.R. 10 Plans). Republic offers a prototype plan for Money Purchase and
Profit Sharing Plans.
SECTION 457 PLAN, 401(K) PLAN, 403(b) PLAN
The Funds, with the exception of the New York Tax-Free Bond Fund, may be used
as vehicles for certain deferred compensation plans provided for by Section 457
of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to
service for state governments, local governments, rural electric cooperatives
and political subdivisions, agencies, instrumentalities and certain affiliates
of such entities. The Funds may also be used as vehicles for both 401(k) plans
and 403(b) plans.
REDEMPTION OF SHARES
A shareholder may redeem all or any portion of the Shares in his account at
any time at the net asset value next determined after a redemption order in
proper form is furnished by the shareholder to his Shareholder Servicing Agent,
and is transmitted to and received by the Transfer Agent. Redemptions are
effected on the same day the redemption order is received by the Transfer Agent
provided such order is received prior to 4:00 p.m., New York time, on any Fund
Business Day. Shares redeemed earn dividends up to and including the Fund
Business Day prior to the day the redemption is effected.
The proceeds of a redemption are normally paid from a Fund in federal funds on
the next Fund Business Day following the date on which the redemption is
effected, but in any event within seven days. The right of any shareholder to
receive payment with respect to any redemption may be suspended or the payment
of the redemption proceeds postponed during any period in which the New York
Stock Exchange is closed (other than weekends or holidays) or trading on such
Exchange is restricted or, to the extent otherwise permitted by the 1940 Act, if
an emergency exists. To be in a position to eliminate excessive expenses, the
Trust and the Advisor Trust reserve the right to redeem upon not less than 30
days' notice all Shares in an account which has a value below $50. However, a
shareholder will be allowed to make additional investments prior to the date
fixed for redemption to avoid liquidation of the account.
A shareholder may redeem Shares only by authorizing his Shareholder Servicing
Agent to redeem such Shares on his behalf (since the account and records of such
a shareholder are established and maintained by his Shareholder Servicing
Agent). For further information as to how to direct a Shareholder Servicing
Agent to redeem Shares, a shareholder should contact his Shareholder Servicing
Agent (see back cover for address and phone number).
SYSTEMATIC WITHDRAWAL PLAN
Any shareholder who owns Shares with an aggregate value of $10,000 or more may
establish a Systematic Withdrawal Plan under which they redeem at net asset
value the number of full and fractional shares which will produce the monthly,
quarterly, semi-annual or annual payments specified (minimum $50.00 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
the investor's principal. Investors contemplating participation in this Plan
should consult their tax advisers. No additional charge to the shareholder is
made for this service.
DIVIDENDS AND DISTRIBUTIONS
For the Fixed Income Fund and the New York Tax-Free Bond Fund, the Advisor
Trust and the Trust, respectively, declares all of each Fund's net investment
income daily as a dividend to the Fund shareholders. Dividends substantially
equal to all of each Fund's net investment income earned during the month are
distributed in that month to each Fund's shareholders of record. For the Equity
Fund, dividends equal to all of the Fund's net investment income earned are
distributed quarterly to the Fund's shareholders of record. For the
International Equity Fund and the Small Cap Equity Fund, such dividends are
distributed annually and semi-annually, respectively. Generally, the Fund's net
investment income consists of the interest and dividend income it earns, less
expenses. In computing interest income, premiums are not amortized nor are
discounts accrued on long-term debt securities in the Portfolio, except as
required for federal income tax purposes.
Each Fund's net realized capital gains, if any, are distributed to
shareholders annually. Additional distributions are also made to the Fund's
shareholders to the extent necessary to avoid application of the 4%
non-deductible federal excise tax on certain undistributed income and net
capital gains of regulated investment companies.
Unless a shareholder elects to receive dividends in cash, dividends are
distributed in the form of additional shares of the Fund (purchased at their net
asset value without a sales charge).
With respect to the Fixed Income Fund, certain mortgage-backed securities may
provide for periodic or unscheduled payments of principal and interest as the
mortgages underlying the securities are paid or prepaid. However, such principal
payments (not otherwise characterized as ordinary discount income or bond
premium expense) will not normally be considered as income to the Fixed Income
Portfolio and therefore will not be distributed as dividends to the Fixed Income
Fund shareholders. Rather, these payments on mortgage-backed securities
generally will be reinvested by the Fixed Income Portfolio in accordance with
its investment objective and policies.
TAX MATTERS
This discussion is intended for general information only. An investor should
consult with his own tax advisor as to the tax consequences of an investment in
the Funds, including the status of distributions from the Funds under applicable
state or local law and, with respect to the New York Tax-Free Bond Fund, the
possible applicability of a federal alternative minimum tax to a portion of the
distributions of the Fund.
Each year, the Trust and the Advisor Trust each intend to qualify the Funds
and elect that the Funds be treated as a separate "regulated investment company"
under Subchapter M of the Code. To so qualify, the Funds must meet certain
income, distribution and diversification requirements. Provided such
requirements are met and all investment company taxable income and net realized
capital gains of the Funds are distributed to shareholders in accordance with
the timing requirements imposed by the Code, generally no federal (or, in the
case of the New York Tax-Free Bond Fund, New York State and New York City)
income or excise taxes will be paid by the Funds on amounts so distributed.
Dividends and capital gains distributions, if any, paid to shareholders are
treated in the same manner for federal and, in the case of the New York Tax-Free
Bond Fund, New York State and New York City income tax purposes whether received
in cash or reinvested in additional shares of the Funds. Shareholders must treat
dividends, other than long-term capital gain dividends, as ordinary income.
Dividends designated by the Funds as long-term capital gain dividends are
taxable to shareholders as long-term capital gain regardless of the length of
time the shares of the Funds have been held by the shareholders. Certain
dividends declared in October, November, or December of a calendar year to
shareholders of record on a date in such a month are taxable to shareholders
(who otherwise are subject to tax on dividends) as though received on December
31 of that year if paid to shareholders during January of the following calendar
year.
NEW YORK TAX-FREE BOND FUND
Federal Income Taxes. After the end of each calendar year, each shareholder
receives a statement setting forth the federal, New York State and New York City
personal income tax status of all dividends and capital gains distributions, if
any, made during that calendar year.
In accordance with the New York Tax-Free Bond Fund's investment objective, it
is expected that most of the Fund's net income will be attributable to interest
from Municipal Obligations and, as a result, most of the dividends to Fund
shareholders will be designated by the Trust as "exempt-interest dividends"
under the Code, which may be treated as items of interest excludible from a
shareholder's gross income for purposes of the regular federal income tax. Since
the preservation of capital and liquidity are important aspects of the New York
Tax-Free Bond Fund's investment objective, the Adviser may from time to time
invest a portion of the Fund's assets in obligations the interest on which is
not exempt from regular federal income taxes. Moreover, dividends attributable
to interest on certain Municipal Obligations which may be purchased for the New
York Tax-Free Bond Fund may be treated as a tax preference item for shareholders
potentially subject to an alternative minimum tax and all exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax or
environmental tax. Although it is not intended, it is possible that the New York
Tax-Free Bond Fund may realize short-term or long-term capital gains or losses
from its portfolio transactions.
Any short-term capital loss realized upon the redemption of shares within six
months from the date of their purchase will be disallowed to the extent of any
exempt-interest dividends received during such period. In addition, any
short-term capital loss realized upon the redemption of shares within six months
from the date of their purchase will be treated as long-term capital loss
(rather than short-term) to the extent of the long-term capital gain or
undistributed capital gain allocable to the redeemed shares.
Shareholders redeeming shares after tax-exempt income has been accrued but not
declared as a dividend should know that the portion of redemption proceeds
representing such income may be subject to taxation as a capital gain even
though it would have been tax-exempt had it been declared as a dividend prior to
redemption. Redemption of shares of the New York Tax-Free Bond Fund can be
effected with the least adverse tax consequences immediately after the first
business day of any month (the time at which the dividend representing
substantially all the income accrued for the previous month is declared).
The Code provides that interest on indebtedness incurred, or continued, to
purchase or carry shares of the New York Tax-Free Bond Fund is not deductible.
Further exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be subject
to federal income tax. Finally, entities or persons who may be "substantial
users" (or persons related to "substantial users") of facilities financed by
industrial development or private activity bonds should consult their tax
advisors before purchasing shares of the New York Tax-Free Bond Fund.
State and Local Taxes. The exemption for federal income tax purposes of
dividends derived from interest on Municipal Obligations does not necessarily
result in an exemption under the income or other tax laws of any state or local
taxing authority. However, to the extent that dividends are derived from
interest on New York Municipal Obligations, the dividends will also be excluded
from the gross income of a New York individual resident shareholder for New York
State and New York City personal income tax purposes.
DIVIDENDS FROM THE NEW YORK TAX-FREE BOND FUND ARE NOT EXCLUDED IN
DETERMINING NEW YORK STATE OR NEW YORK CITY FRANCHISE TAXES ON CORPORATIONS
AND FINANCIAL INSTITUTIONS.
OTHER FUNDS
Foreign Tax Withholding. Income received by the Funds or Portfolios from
sources within foreign countries may be subject to withholding and other income
or similar taxes imposed by such countries. In the case of the Fixed Income
Fund, International Equity Fund and Small Cap Equity Fund, if more than 50% of
the value of a Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, the corresponding Fund will be
eligible and intends to elect to treat its share of any non-U.S. income and
similar taxes it pays (or which are paid by the Portfolio) as though the taxes
were paid by the Fund's shareholders. Pursuant to this election, a shareholder
will be required to include in gross income (in addition to taxable dividends
actually received) his pro rata share of the foreign taxes paid by the Fund or
Portfolio, and will be entitled either to deduct (as an itemized deduction) his
pro rata share of foreign income and similar taxes in computing his taxable
income or to use it as a foreign tax credit against his U.S. federal income tax
liability, subject to limitations. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions, but such a shareholder may be
eligible to claim the foreign tax credit. Shareholders will be notified within
60 days after the close of the taxable years for the Fixed Income Fund,
International Equity Fund and Small Cap Equity Fund whether the foreign taxes
paid by the Funds or Portfolios will be treated as paid by the shareholders of
each Fund for that year. Furthermore, foreign shareholders may be subject to
U.S. tax at the rate of 30% (or lower treaty rate) of the income resulting from
a Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but will not be able to claim a credit or deduction for the
foreign taxes treated as having been paid by them.
The Funds generally will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividends paid, capital gain
distributions, and redemption proceeds to shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer
identification number ("TIN") or social security number and to make such
certifications as the Funds may require, (2) the Internal Revenue Service
notifies the shareholder or the Funds that the shareholder has failed to
report properly certain interest and dividend income to the Internal Revenue
Service and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he is not subject to backup
withholding. Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's federal income tax
liability. Dividends from a Fund attributable to that Fund's net investment
income and short-term capital gains generally will be subject to U.S.
withholding tax when paid to shareholders treated under U.S. tax law as
nonresident alien individuals or foreign corporations, estates, partnerships
or trusts.
------------------------------
The Trust and the Advisor Trust are each organized as a Massachusetts business
trust and, under current law, is not liable for any income or franchise tax in
the Commonwealth of Massachusetts as long as each series of the Trust and the
Advisors Trust (including the Funds) qualifies as a "regulated investment
company" under the Code.
For additional information relating to the tax aspects of investing in the
Funds, see the Statements of Additional Information.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Declarations of Trust of each the Trust and the Advisor Trust permits
their respective Trustees to issue an unlimited number of full and fractional
shares of beneficial interest (par value $0.001 per share) and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in the Trust or the Advisor
Trust. The shares of each series participate equally in the earnings, dividends
and assets of the particular series. Currently, the Trust has seven series of
shares, each of which constitutes a separately managed fund. The Advisor Trust
has three series of shares, each of which constitutes a separately managed fund.
The Trust and the Advisor Trust each reserve the right to create additional
series of shares. Currently, the New York Tax-Free Bond Fund and Equity Fund are
divided into two classes of shares.
Each share of each class, if applicable, of a Fund represents an equal
proportionate interest in the Fund with each other share. Shares have no
preference, preemptive, conversion or similar rights. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held on matters on which they are entitled
to vote. The Trust and Advisor Trust are not required and have no current
intention to hold annual meetings of shareholders, although the Trust and the
Advisor Trust will hold special meetings of Fund shareholders when in the
judgment of the Trustees of the Trust or the Advisor Trust it is necessary or
desirable to submit matters for a shareholder vote. Shareholders of each series
generally vote separately, for example, to approve investment advisory
agreements or changes in fundamental investment policies or restrictions, but
shareholders of all series may vote together to the extent required under the
1940 Act, such as in the election or selection of Trustees, principal
underwriters and accountants for the Trust or the Advisor Trust. Under certain
circumstances the shareholders of one or more series could control the outcome
of these votes. Shares of each class of a series (New York Tax-Free Bond Fund
and Equity Fund) represent an equal pro rata interest in such series and,
generally, have identical voting, dividend, liquidation, and other rights,
preferences, powers, terms and conditions, except that: (a) each class shall
have a different designation; (b) each class of shares shall bear any class
expenses; and (c) each class shall have exclusive voting rights on any matter
submitted to shareholders that relate solely to its distribution arrangement,
and each class shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class.
The series of the Portfolio Trust will vote separately or together in the same
manner as the series of the Advisor Trust. Under certain circumstances, the
investors in one or more series of the Portfolio Trust could control the outcome
of these votes.
Shareholders of the Funds have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees by a
specified number of shareholders) the right to communicate with other
shareholders of the Trust or the Advisor Trust in connection with requesting a
meeting of shareholders of the Trust or the Advisor Trust for the purpose of
removing one or more Trustees. Shareholders of the Trust and the Advisor Trust
also have the right to remove one or more Trustees without a meeting by a
declaration in writing subscribed to by a specified number of shareholders. Upon
liquidation or dissolution of a Fund, shareholders of the Fund would be entitled
to share pro rata in the net assets of the Fund available for distribution to
shareholders.
The Declarations of Trust of each of the Trust and the Advisor Trust provides
that, at any meeting of shareholders of the Funds, the Trust or the Advisor
Trust, a Shareholder Servicing Agent may vote any shares as to which such
Shareholder Servicing Agent is the agent of record and which are otherwise not
represented in person or by proxy at the meeting, proportionately in accordance
with the votes cast by holders of all shares otherwise represented at the
meeting in person or by proxy as to which such Shareholder Servicing Agent is
the agent of record. Any shares so voted by a Shareholder Servicing Agent will
be deemed represented at the meeting for purposes of quorum requirements.
The Trust and the Advisor Trust are each an entity of the type commonly known
as a "Massachusetts business trust". Under Massachusetts law, shareholders of
such a business trust may, under certain circumstances, be held personally
liable as partners for its obligations. However, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and the Trust itself
was unable to meet its obligations.
The Portfolio Trust is organized as a master trust fund under the laws of the
State of New York. The Portfolios are separate series of the Portfolio Trust,
which currently has only these three series. The Portfolio Trust's Declaration
of Trust provides that the Fixed Income Fund, International Equity Fund and
Small Cap Equity Fund and other entities investing in the Portfolio (e.g., other
investment companies, insurance company separate accounts and common and
commingled trust funds) are each liable for all obligations of their respective
Portfolio. However, the risk of a Fund incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Trustees of the Advisor Trust believe that neither the Fixed
Income Fund, International Equity Fund and Small Cap Equity Fund nor their
shareholders will be adversely affected by reason of the investment of all of
the Assets of the Advisor Funds in their corresponding Portfolios.
Each investor in the Portfolios, including the Fixed Income Fund,
International Equity Fund and Small Cap Equity Fund, may add to or reduce its
investment in the Portfolios on each Portfolio Business Day. At 4:00 p.m., New
York time on each Portfolio Business Day, the value of each investor's
beneficial interest in the Portfolios is determined by multiplying the net asset
value of each Portfolio by the percentage, effective for that day, which
represents that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or withdrawals, which are to be effected on that day,
are then effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio is then recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m., New York time on such day plus or minus, as
the case may be, the amount of any additions to or withdrawals from the
investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time on such day plus or minus, as the case may be, the
amount of the net additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The percentage so determined is
then applied to determine the value of the investor's interest in the Portfolio
as of 4:00 p.m., New York time on the following Portfolio Business Day.
PERFORMANCE INFORMATION
Total return and yield data for the Funds may from time to time be included in
advertisements about the Trust and the Advisor Trust. The Trust may also include
tax equivalent yield data for the New York Tax-Free Bond Fund. "Total return" is
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in a Fund over periods of 1, 5 and 10 years. All total
return figures reflect the deduction of a proportional share of Fund expenses on
an annual basis, and assume that all dividends and distributions are reinvested
when paid. "Yield" refers to the income generated by an investment in a Fund
over the 30-day (or one month) period ended on the date of the most recent
balance sheet of the Fund included in the Trust's or the Advisor Trust's
registration statement with respect to the Fund. The "tax equivalent yield"
refers to the yield that a fully taxable bond fund would have to generate, given
a stated aggregate state and local income tax rate, in order to produce an
after-tax yield equivalent to that of the New York Tax-Free Bond Fund. The use
of a tax equivalent yield allows investors to compare the yield of the New York
Tax-Free Bond Fund, all or a significant portion of which is exempt from regular
federal, New York State and New York City personal income taxes, with yields of
funds which are not so tax exempt. See the Statement of Additional Information
for further information concerning the calculation of yield and total return
data.
Historical total return information for any period or portion thereof prior to
the establishment of the Fixed Income Fund, International Equity Fund or Small
Cap Equity Fund will be that of its corresponding Portfolio, adjusted to assume
that all charges, expenses and fees of the Fund and its respective Portfolio
which are presently in effect were deducted during such period.
Since these total return, yield and tax equivalent yield quotations are based
on historical earnings and since a Fund's total return yield and tax equivalent
yield fluctuate from day to day, these quotations should not be considered as an
indication or representation of a Fund's total return, yield or tax equivalent
yield, if applicable, in the future. Any performance information should be
considered in light of a Fund's investment objective and policies,
characteristics and quality of the Fund's portfolio and the market conditions
during the time period indicated, and should not be considered to be
representative of what may be achieved in the future. From time to time the
Trust and the Advisor Trust may also use comparative performance information in
such advertisements, including the performance of unmanaged indices, the
performance of the Consumer Price Index (as a measure for inflation), and data
from Lipper Analytical Services, Inc. and other industry publications.
The following table sets forth the average annual total returns of all
institutional separate accounts and, in the case of the International Equity
Fund, institutional private accounts and collective investment vehicles managed
by the Fixed Income Sub-Adviser, Equity Sub-Adviser, International Equity
Sub-Adviser and Small Cap Equity Sub-Adviser with investment objectives,
policies and restrictions substantially similar to the Fixed Income Fund, Equity
Fund, International Equity Fund and Small Cap Equity Fund and their
corresponding Portfolio, if applicable, and which have been managed as the
Portfolios have been, are are expected to be, managed.
The composite data is provided to illustrate the past performance of the
Sub-Advisers in managing substantially similar accounts as measured against the
specified market index and does not represent the performance of the Fixed
Income Fund, Equity Fund, International Equity Fund or Small Cap Equity Fund or
the Fixed Income Portfolio, International Equity Portfolio or Small Cap Equity
Portfolio. While the Fixed Income Fund and International Equity Fund were not
operational before August 1, 1996 and have no performance history to compare to
their respective Sub-Advisers composite or the specified index, the Fixed Income
Portfolio and International Equity Portfolio have been operational since January
9, 1995 and the Equity Fund since August 1, 1995. The Small Cap Equity Portfolio
has been operational only since September 3, 1996. Accordingly, a Fund composite
reflecting each Portfolio's performance, adjusted to assume that all charges,
expenses and fees of each Fund currently in effect were deducted during the
relevant time periods, is also provided below. Investors should not consider
this composite performance data as an indication of future performance of the
Funds, the Portfolios or the Sub-Advisers.
The institutional separate accounts and, in the case of the International
Equity Fund, institutional private accounts and collective investment vehicles
that are included in each Sub-Adviser's composite are not subject to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Fund and the Portfolio by the 1940 Act or the Code.
Consequently, the performance results of each Sub-Adviser's composite could have
been adversely affected if the institutional separate accounts included in the
composite had been regulated as investment companies under the federal
securities laws.
Returns for each period assume reinvestment of all net investment income, are
adjusted to assume that all charges, expenses and fees of each Fund and each
Portfolio which are currently in effect (as measured by the current expense
ratios of the Fund and the Portfolio) were deducted during such periods, and are
calculated in accordance with Securities and Exchange Commission guidelines. The
investment results of each Sub-Adviser's composite presented below are unaudited
and are not intended to predict or suggest the returns that might be experienced
by the Fixed Income Fund, Equity Fund, International Equity Fund and Small Cap
Equity Fund or an individual investing in the Funds.
FIXED INCOME
SUB-ADVISOR
--------------------------
ANNUALIZED RETURNS
--------------------------
SUB-ADVISER SALOMON BIG FUND
COMPOSITE INDEX(2) COMPOSITE
--------- -------- ---------
1 Year(1) ............................ 5.29% 3.62% 5.02%
Since Portfolio Inception (1/9/95) ... N/A 10.91% 11.20%
5 Years(1) ........................... 7.43% 7.13% N/A
10 Years(1) .......................... 8.52% 8.51% N/A
- ------------
(1) Through December 31, 1996.
(2) The Salomon Broad Investment Grade Bond Index is a market-capitalization-
based total return index containing U.S. fixed rate issues having a maturity
of greater than one year and at least $25 million outstanding. The Salomon
BIG Index includes Treasury, Government-sponsored, mortgage-backed, and
investment grade corporate issues.
EQUITY SUB-ADVISORS
---------------------------------------------------------------
RUSSELL RUSSELL
ALLIANCE 1000 BRINSON 1000 FUND RUSSELL
COMPOSITE GROWTH(2) COMPOSITE VALUE(3) COMPOSITE 1000(4)
--------- --------- --------- -------- --------- -------
1 Year(1) ..... 22.15% 23.11% 25.60% 21.63% 15.64% 22.42%
Since
Inception* ... 22.68% 23.47% 28.33% 21.63% 19.19% 23.96%
5 Years(1) .... 14.53% 13.38% 18.87% 17.26% N/A 15.25%
9 Years(1) .... 16.24% 16.62% 18.90% 16.38% N/A 16.54%
10 Years(1) ... N/A 15.44% 17.46% 14.68% N/A 15.10%
- ------------
(1) Through December 31, 1996.
(2) The Russell 1000 Growth Index is an unmanaged index of those companies in
the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values.
(3) The Russell 1000 Value Index is an unmanaged index of those companies in the
Russell 1000 Index with lower price-to-book ratios and lower forecasted
growth values.
(4) The Russell 1000 Index is an unmanaged index of the 1000 largest U.S.
companies (representing approximately 90% of the total market
capitalization) in the Russell 3000 Index, which represents approximately
98% of the U.S. equity market by capitalization.
* Since Fund inception (8/1/95).
INTERNATIONAL EQUITY
SUB-ADVISOR
--------------------------
ANNUALIZED RETURNS
--------------------------
SUB-ADVISOR EAFE FUND
COMPOSITE INDEX(2) COMPOSITE
--------- -------- ---------
1 Year(1) ............................ 14.91% 6.34% 15.09%
Since Portfolio Inception (1/9/95) ... N/A 10.14% 13.96%
5 Years(1) ........................... 11.63% 8.49% N/A
10 Years(1) .......................... 11.06% 8.74% N/A
- ------------
(1) Through December 31, 1996.
(2) The EAFE Index includes 1,112 companies in twenty countries representing the
stock markets of Europe, Australia, New Zealand and the Far East. The
combined market capitalization of these companies represents approximately
60% of the aggregate market value of the stock exchanges. The EAFE Index is
capitalization weighted in U.S. dollars and includes dividends.
SMALL CAP EQUITY
SUB-ADVISOR
--------------------------
ANNUALIZED RETURNS
--------------------------
SUB-ADVISOR RUSSELL 2000 FUND
COMPOSITE INDEX(2) COMPOSITE
--------- -------- ---------
1 Year(1) ............................ 19.17% 16.49% N/A
Since Portfolio Inception (1/3/96) ... N/A 9.48% 8.64%
3 Years(1) ........................... 24.87% 13.68% N/A
- ------------
(1) Through December 31, 1996.
(2) The Russell 2000 Small Stock Index is an unmanaged index of the 2000
smallest companies (representing approximately 10% of the total market
capitalization) in the Russell 3000 Index, which represents approximately
98% of the U.S. equity market by capitalization.
Any performance information should be considered in light of each Advisor
Fund's investment objective and policies, characteristics and quality of the
Advisor Fund's portfolio and the market conditions during the time period
indicated, and should not be considered to be representative of what may be
achieved in the future. From time to time the Advisor Trust may also use
comparative performance information in such advertisements, including the
performance of unmanaged indices, the performance of the Consumer Price Index
(as a measure for Inflation), and data from Lipper Analytical Services, Inc.
and other industry publications.
A Shareholder Servicing Agent may charge its customers direct fees in
connection with an investment in the Funds, which will have the effect of
reducing the net return on the investment of customers of that Shareholder
Servicing Agent Conversely, the Trust and the Advisor Trust have been advised
that certain Shareholder Servicing Agents may credit to the account of their
customers from whom they are already receiving other fees amounts not exceeding
such other fees or the fees received by the Shareholder Servicing Agent from the
Fund, which will have the effect of increasing the net return on the investment
of such customers of Shareholder Servicing Agents. Such customers may be able to
obtain through their Shareholder Servicing Agent quotations reflecting such
decreased or increased return.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Trust or the Advisor
Trust, as applicable, 3435 Stelzer Road, Columbus, Ohio 43219-3035.
GENERAL AND ACCOUNT INFORMATION (888/525-5757 (TOLL FREE)
--------------------
The Statements of Additional Information by each of the Trust and the Advisor
Trust, dated March 1, 1997, with respect to each Fund contains more detailed
information about the Fund, including information related to (i) the Fund's
investment restrictions, (ii) the Trustees and officers of the Trust and the
Manager, Adviser, Sub-Adviser and Sponsor of the Fund, as applicable, (iii)
portfolio transactions, (iv) the Fund's shares, including rights and liabilities
of shareholders, and (v) additional yield information, including the method used
to calculate the total return, yield and tax equivalent yield, if applicable, of
the Fund.
<PAGE>
APPENDIX A
The characteristics of corporate debt obligations rated by Moody's are
generally as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements. The
future of such bonds cannot be considered as well assured.
B -- Bonds which are rated B generally lack characteristics of a desirable
investment.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca are speculative to a high degree.
C -- Bonds rated C are the lowest rated class of bonds and are regarded as
having extremely poor prospects.
The characteristics of corporate debt obligations rated by S&P are generally
as follows:
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debts in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB is predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with terms of the obligation. BB
indicates the lowest degree of speculation; CC indicates the highest degree of
speculation.
BB, B, CCC AND CC -- Debt in these ratings is predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with terms
of the obligation. BB indicates the lowest degree of speculation and CC the
highest.
A bond rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by the rating services from other sources which they consider reliable.
The ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of, such information, or for other reasons.
The characteristics of corporate debt obligations rated by Fitch are generally
as follows:
AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short term debt of these issuers is generally rated "-/+".
A -- Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payments of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD AND D-- Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the DDD, DD, or D categories.
RATINGS OF COMMERCIAL PAPER
Commercial paper rated A-1 by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; the issuer's long-term debt is
rated A or better; the issuer has access to at least two additional channels of
borrowing; and basic earnings and cash flow have an upward trend with allowances
made for unusual circumstances. Typically, the issuer's industry is well
established and the issuer has a strong position within the industry.
Commercial paper rated Prime-1 by Moody's is the highest commercial paper
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and consumer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative strength or
weakness of the above factors determine how the issuer's commercial paper is
rated with various categories.
<PAGE>
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLES
The tables below show the approximate taxable yields which are equivalent to
tax-exempt yields, for the ranges indicated, under (i) federal and New York
State personal income tax laws, and (ii) federal, New York State and New York
City personal income tax laws, in each case based upon the applicable 1996
rates. Such yields may differ under the laws applicable to subsequent years if
the effect of any such law is to change any tax bracket or the amount of taxable
income which is applicable to a tax bracket. Separate calculations, showing the
applicable taxable income brackets, are provided for investors who file single
returns and for those investors who file joint returns. For cases in which two
or more state (or city) brackets fall within a federal bracket, the highest
state (or city) bracket is combined with the federal bracket. The combined
income tax brackets shown reflect the fact that state and city income taxes are
currently deductible as an itemized deduction for federal tax purposes (however,
a taxpayer's itemized deductions may be subject to an overall limitation, the
effect of which has not been taken into account in preparing these tables).
<TABLE>
<CAPTION>
FEDERAL AND NEW YORK STATE TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
- --------------------------------------- INCOME -----------------------------------------------------------------------------
SINGLE JOINT TAX 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
RETURN RETURN BRACKET** EQUIVALENT TAXABLE YIELD
- ------------------- ------------------ ----------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,000 $ 0-$ 40,100 21.06% 2.53% 3.17% 3.80% 4.43% 5.07% 5.70% 6.33% 6.97% 7.60% 8.23%
$ 24,001-$ 58,150 $ 40,101-$ 96,900 33.13% 2.99% 3.74% 4.49% 5.23% 5.98% 6.73% 7.48% 8.22% 8.97% 9.72%
$ 58,151-$121,300 $ 96,901-$147,700 35.92% 3.12% 3.90% 4.68% 5.46% 6.24% 7.02% 7.80% 8.58% 9.36% 10.14%
$121,301-$263,750 $147,701-$263,750 40.56% 3.36% 4.21% 5.05% 5.89% 6.73% 7.57% 8.41% 9.25% 10.09% 10.94%
Over $263,750 Over $263,750 43.90% 3.57% 4.46% 5.35% 6.24% 7.13% 8.02% 8.91% 9.80% 10.70% 11.59%
- ----------
*Net amount subject to federal and New York State personal income tax after deductions and exemptions.
**Effective combined federal and state tax bracket. This table does not take into account: (i) any taxes other than the regular
federal income tax and the regular New York State personal income tax; or (ii) the New York State tax table benefit recapture tax.
Also, it is assumed that: (i) there are no federal or New York State minimum taxes applicable; (ii) a shareholder has no net
capital gain; and (iii) a shareholder's taxable income for federal income tax purposes is the same as his or her taxable income
for New York State income tax purposes. Also, this table does not reflect the fact that, due to factors including the federal
phase-out of personal exemptions and reduction of certain itemized deductions for taxpayers whose adjusted gross income exceed
specified thresholds, a shareholder's effective marginal tax rate may differ from his or her tax bracket rate.
<PAGE>
<CAPTION>
FEDERAL, NEW YORK STATE AND NEW YORK CITY TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* TAX-EXEMPT YIELD
- --------------------------------------- INCOME -----------------------------------------------------------------------------
SINGLE JOINT TAX 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
RETURN RETURN BRACKET** EQUIVALENT TAXABLE YIELD
- ------------------- ------------------ ----------- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 $ 24,000 $ 0-$ 40,100 24.79% 2.66% 3.32% 3.99% 4.65% 5.32% 5.98% 6.65% 7.31% 7.98% 8.64%
$ 24,001-$ 50,000 $ 40,101-$ 96,900 36.30% 3.14% 3.92% 4.71% 5.49% 6.28% 7.06% 7.85% 8.63% 9.42% 10.20%
$ 50,001-$121,300 $ 96,901-$147,700 39.00% 3.28% 4.10% 4.92% 5.74% 6.56% 7.38% 8.20% 9.02% 9.84% 10.66%
$121,301-$263,750 $147,701-$263,750 43.42% 3.53% 4.42% 5.30% 6.19% 7.07% 7.95% 8.84% 9.72% 10.60% 11.49%
Over $263,750 Over $263,750 46.60% 3.75% 4.68% 5.62% 6.55% 7.49% 8.43% 9.36% 10.30% 11.24% 12.17%
- ----------
*Net amount subject to federal, New York State and New York City personal income tax after deductions and exemptions.
**Effective combined federal, state and city tax bracket. This table does not take into account: (i) any taxes other than the
regular federal income tax, the regular New York State personal income tax, and the regular New York City personal income tax
(including the temporary tax surcharge and the additional tax); or (ii) the New York State tax table benefit recapture tax. Also,
it is assumed that: (i) there are no federal, state or city minimum taxes applicable; (ii) a shareholder has no net capital gain;
and (iii) a shareholder's taxable income for federal income tax purposes is the same as his or her income for state and city tax
purposes. Also, this table does not reflect the fact that, due to factors including the federal phase-out of personal exemptions
and reduction of certain itemized deductions for taxpayers whose adjusted gross income exceed specified thresholds, a
shareholder's effective marginal tax rate may differ from his or her tax bracket rate.
</TABLE>
While it is expected that most of the dividends paid to the shareholders of
the New York Tax-Free Bond Fund will be exempt from federal, New York State and
New York City personal income taxes, portions of such dividends from time to
time may be subject to such taxes.
<PAGE>
REPUBLIC NEW YORK TAX-FREE BOND FUND (ADVISER CLASS)
REPUBLIC EQUITY FUND (ADVISER CLASS)
REPUBLIC FIXED INCOME FUND
REPUBLIC INTERNATIONAL EQUITY FUND
REPUBLIC SMALL CAP EQUITY FUND
REPUBLIC FAMILY OF FUNDS: SUB-ADVISERS
CUSTOMER SERVICE REPUBLIC EQUITY FUND
Republic National Bank of New York Alliance Capital Management, L.P.
452 Fifth Avenue 1345 Avenue of the Americas
New York, NY 10018 New York, NY 10105
(800) 782-8183
Brinson Partners, Inc.
INVESTMENT ADVISER 209 South LaSalle Street
Republic National Bank of New York Chicago, IL 60604
452 Fifth Avenue
New York, NY 10018 REPUBLIC FIXED INCOME FUND
Miller Anderson & Sherrerd
ADMINISTRATOR, DISTRIBUTOR AND SPONSOR One Tower Bridge
BISYS Fund Services West Conshohocken, PA 19428
3435 Stelzer Road
Columbus, OH 43219 REPUBLIC INTERNATIONAL EQUITY FUND
Capital Guardian Trust Company
CUSTODIAN AND TRANSFER AGENT 11100 Santa Monica Boulevard
Investors Bank & Trust Company Los Angeles, CA 90025
89 South Street
Boston, MA 02111 REPUBLIC SMALL CAP EQUITY FUND
MFS Institutional Advisors, Inc.
INDEPENDENT AUDITORS 500 Boylston Street
KPMG Peat Marwick LLP Boston, MA 02116
99 High Street
Boston, MA 02110
LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
RFFAC (3/97)
